NILQ 62-1 prelims.qxd - Northern Ireland Legal Quarterly

NorthernIreland Legal

QuarterlyVolume 62 Number 1

EDITOR

PROFESSOR SALLY WHEELER

School of Law

Contents

Northern Ireland Legal Quarterly Volume 62 Number 1

Law and the neoliberal vision: financial property, pension privatisation andthe ownership societyPaddy Ireland ............................................................................................................................... 1

Gordian knots in Europeanised private law: unfair terms, bank charges andpolitical compromisesJames P Devenney ....................................................................................................................... 33

We need to talk: “democratic dialogue” and the ongoing saga of prisonerdisenfranchisementC R G Murray .......................................................................................................................... 57

Compensating defrauded shareholders in insolvency: is parity the answer?Blanca Mamutse ......................................................................................................................... 75

Not an invitation to rape: the Sexual Offences Act 2003, consent and thecase of the “drunken” victimGeorgina Firth ........................................................................................................................... 99

The International Criminal Tribunal for the Former Yugoslavia: paving theway for modern international humanitarian law enforcementAndrew Woodcock..................................................................................................................... 119

Erratum

In NILQ 61(4) (winter 2010), in “Multilateral governance of financial markets: the case ofsovereign wealth funds” by George Gilligan. At p. 400 Gilligan quotes directly from one ofthe US interview respondents. The latter stated that: “In 2007, FINRA [Financial IndustryRegulatory Authority] slightly increased reporting requirements around sovereigninvestment . . .” In fact, as correctly stated in n. 49, it was the Committee on ForeignInvestment in the United States (CFIUS) that issued the relevant notice. FINRA does nothave regulatory responsibility for sovereign investment in the US.

Law and the neoliberal vision: financialproperty, pension privatisation and the

ownership societyPADDY IRELAND

Kent University

NILQ 62(1): 1–32

1Introduction

When the financial crisis first broke, there was much speculation about whether it wouldprove a historic watershed which marked the end of the neoliberal era. It is, of

course, still early days but there are, as yet, few signs that it will. On the contrary, the greatmajority of policymakers clearly hope that by supplementing the unprecedented fiscal andmonetary stimuli which have already been administered with a dose of spending cuts,mandated austerity and “regulatory reform”, things will return (more or less) to normal,enabling a more sober and sustainable version of the old regime to emerge.1 The result isthat at the moment the remnants of social democracy seem more likely to fall victim to thecrisis than neoliberalism. Even within the business community, however, there are doubtsabout how far it will be possible to resume business as usual. Richard Lambert, outgoingDirector General of the Confederation of British Industry, for example, recently suggestedthat “the public and political response to what’s happened will . . . have troublingconsequences”, criticising everything from short-termism, executive pay and businessculture to shareholder value, hostile takeovers and foreign shareholders. EndorsingLambert’s comments, John Plender of the Financial Times argued that “something radicalha[d] to be done” if business was “not to suffer from a permanent legitimacy deficit”, whileRoger Bootle of Capital Economics thought there was “a real crisis of capitalism about allthis”.2 These hints that serious problems might be imminent have been echoed on the left.With the “conventional mantras” about the ability of “free markets and free trade, privateproperty and personal responsibility, and low taxes and minimalist state intervention in

1 The remarkable degree of establishment consensus about this has been reflected in the quiet but growingconvergence around a regime of what Susan Watkins has called “regulatory liberalism” in which the maincomponents of the old regime – unfettered capital movements, free trade, “small” states, and privateownership (not least of banks) – remain firmly intact: S Watkins, “Shifting sands” (Jan–Feb 2010) 61 New LeftReview 5, p. 13. She describes the crisis as having been “eerily non-agonistic”, p. 20.

2 R Lambert, “Does business have a role as a ‘force for good’ in creating a more sustainable economic, socialand environmental future?”, RSA/Sky Sustainable Business Lecture Series, 30 March 2010; J Plender, “Toavoid a backlash, executives must act on pay”, Financial Times, 2 April 2010; R Bootle, “Executive pay: whatthe experts say”, The Guardian, 31 March 2010, www.guardian.co.uk/business/2010/mar31/executive-pay-what-the-experts-say. This nervousness perhaps explains the rather hysterical and paranoid business reactionto Vince Cable’s party conference speech in 2010.

social provision” to create a world of plenty “sound[ing] increasingly hollow”, DavidHarvey has argued, “a crisis of legitimacy looms”.3

Certainly, social unrest is growing, both in the UK and elsewhere, and the public moodis likely to darken further as public spending cuts and the “age of austerity” begin to bite.4Equally importantly, perhaps, it is already clear that the neoliberal vision of a world ofinclusive “ownership societies” – populated by self-reliant “worker capitalists” who owntheir own homes and, through pension funds, modest amounts of financial property – isunravelling. This is potentially very significant for, in places like the UK, this vision has notonly animated and influenced much recent policy-making, including (as we shall see) thegrowing focus on investor protection, but provided an important source of meaning,motivation and hope in people’s lives and helped to legitimate many of the changes whichhave occurred in recent decades. If John Prescott’s claim that “we’re all middle class now”seemed a tad premature in 1997, in the decade following, more and more peopleundoubtedly became “petty bourgeois . . . by imaginative orientation if not by economicfact”.5 Will these imaginings survive the economic facts which are likely to emerge in thecoming years and, if they don’t, what will the consequences be?

Using pension privatisation as a vehicle, this article examines the impact of the financialcrisis on the neoliberal vision. It argues that the vision is underlain by an economicallydeterminist account of economic and social development which has had a major impact notonly on economic and social policy but on legal policy and thinking about law. Thiseconomic determinism, it suggests, is rooted in mistaken ideas about the nature of marketsand property, and financial property in particular; ideas which underpin equally misguidedconceptions of self-reliance which deny our growing interdependence. The article moveson to explore the nature of neoliberalism and the gulf between neoliberal ideology andneoliberal practice, before concluding by arguing that the crisis represents an opportunityto re-enrich legal scholarship by cleansing it of the debilitating economic determinism withwhich so much of it has become infected and engaging in a radical rethink of whatregulatory reform should entail.

2 The rise of pension privatisation

Since the 1980s there has been a concerted move away from traditional, pay-as-you-go(PAYG), state-administered pension systems in which tax revenues are used to pay pensionbenefits, towards privatised systems in which privately managed pension funds investsavings made by individuals during their working lives in financial property – in intangiblerights to receive future revenues, such as government stock, corporate shares and corporatebonds. The idea is that by the time of their retirement, the old will directly or indirectly own(or have temporary, time-limited, beneficial claims over) sufficient revenue rights to live offor to fund the purchase of an annuity. They will, in other words, be able to becomepensioner rentiers.

There are important differences between the two systems. Firstly, whereas in traditionalpublic, state-administered systems benefits are defined in advance, in privatised systems, as“defined contribution” schemes replace “defined benefit” schemes, benefits increasinglydepend on the returns accruing to the financial property held in individual accounts.Secondly, in traditional PAYG systems, risk is pooled and collectivised, with the result that

Northern Ireland Legal Quarterly 62(1)2

3 D Harvey, The Enigma of Capital (London: Verso 2010), p. 217.4 At the time of writing, there have already been outbursts of public anger in places such as Greece, Ireland,

Spain and France, as well as in the UK, where university tuition fees have generated furious protests.5 R Unger, The Left Alternative (London: Verso 2002), p. 47. Shortly before the 1997 election, John Prescott

famously announced that “we’re all middle class now”.

PAYG systems tend to be redistributive between both classes and genders, and within andbetween generations. By contrast, in privatised systems, where pension benefits are tied toindividual contributions, there is little or no redistribution within or between classes orgenders; risk and reward are individualised. Unlike the financing of traditional PAYGsystems, however, the financing of private pensions is said to be “fully funded”, meaningthat the fund from which the pensions are drawn is on hand when retirement commences,derived as it is from earlier saving. It is therefore suggested that in privatised systemspensioners do not impose a burden on the younger generation but provide for themselves inretirement using the returns accruing to (and/or capital value of) their financial property.6

The move towards pension privatisation began in Chile under Pinochet in the late 1970s,led by the then Minister of Labour and Social Security, Jose Pinera.7 The existing publicPAYG system was replaced by a fully funded privatised system in which the savings ofworkers are invested in financial property held in personal retirement accounts administeredby private, profit-oriented enterprises. Under the scheme, existing employees are compelledto invest 10 per cent of their wages, with the option of investing up to another 10 per centvoluntarily. They are allowed to choose between a range of investment institutions offeringdifferent mixes of bonds, equities, home and foreign investments, giving them some say inhow (riskily) their funds are invested. Retirement age is a matter for the worker, the size ofwhose accumulated fund determines his or her benefits. There is a state top-up to theindividual savings accounts of those who have worked for at least 20 years but failed toaccumulate sufficient capital to buy a minimum annuity; a low-level welfare pension,unrelated to years worked, is available to those in extreme poverty.8

The reforms implemented in Chile paved the way for pension privatisation elsewhere.In the UK, for example, the Thatcher government began to promote pension privatisationin the 1980s, increasing the state pension in line with prices rather than gross earnings,causing its relative value to fall significantly.9 At the same time, as previously state-ownedindustries were privatised, the government began to encourage people to engage in director indirect ownership of financial property, introducing a variety of tax-favoured forms ofsaving and investment, a process continued by New Labour.10 Crucially, the 1980s also sawvarious international agencies start to advocate shifting the management of social risk awayfrom the state towards the individual. The International Monetary Fund (IMF) announcedthat it was no longer realistic to assume that the real value of state pensions could bemaintained,11 while the Organisation for Economic Co-operation and Development(OECD) began to dispense advice on how pension provision might be incrementally

Law and the neoliberal vision

6 See M Orenstein, Privatizing Pensions (Princeton: Princeton University Press 2008), pp. 179–93.7 Pinera, a Chicago-trained economist is the brother of the current Chilean President (and dollar billionaire),

Sebastian Pinera.8 See A F Yazigi (ed.), The Chilean Pension System (Santiago: SAFP 2003). The contributions made by workers are

tax deductible and the returns on the investments untaxed until withdrawal on retirement. On retirement,workers can choose to draw on their accumulated fund each month or use it to purchase an annuity from alife insurance company.

9 The state pension fell in value from 20% to less than 15% of average earnings between the late 1970s and2001: O Attansio and S Rohwedder, “Pension wealth and household saving: evidence from pension reformsin the UK”, IFS Working Paper WP01/21 (2001), p. 5. The coalition government recently announced that itintends to restore the earnings link for the basic state pension from April 2011, but also intends to raise theretirement age.

10 See J Banks and S Tanner, Household Saving in the UK (London: IFS 1999), pp. 89–90; P Saunders and C Harris,Privatization and Popular Capitalism (Buckingham: Open University Press 1994); P Ireland, “Shareholderprimacy and the distribution of wealth” (2005) 68 Modern Law Review 49.

11 See D Henwood (December 1994) Left Business Observer, issue 67. The IMF was, by then, using loanconditionality to impose “structural reforms” on indebted countries.

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privatised.12 The seminal moment came in 1994 with the publication by the World Bank ofAverting the Old Age Crisis: Policies to protect the old and promote growth, a policy report whichproposed a multi-pillar approach to pension provision. Mandatory, defined contributionsavings schemes in which workers’ savings are invested by privately managed financialinstitutions provide the main pillar. Existing defined benefit, public pensions provide thesecond pillar, though offering only a safety net. Voluntary savings and annuity schemesprovide a third pillar for those with the means and inclination to save more.13 Promoted bythe World Bank and other international agencies, particularly in South America and post-Communist Eastern Europe, these ideas steadily spread among policymakers and academicsduring the course of the 1990s.14 Although the campaign met with opposition (led byJoseph Stiglitz) from within the World Bank and this had some impact on the adviceoffered, it was “mostly rebuffed by the pension reform community within the Bank”.15

3 The economic case for pension privatisation

NEOLIBERALISM AND THE RATIONALITY OF THE MARKET

Why has the idea of privatising pensions attracted so much support? As the title of theWorld Bank report suggests, many believe that pension privatisation is the only way todefuse the “demographic time bomb” confronting state systems. Indeed, by the time itappeared, greater longevity was already being portrayed as a threat rather than as a cause forcelebration. The report also, however, put a positive case for pension privatisation rooted ina specifically neoliberal vision of economic, social and individual development.

This case was composed of two strands, one economic and one ethical. The economicstrand, which was highlighted by the emphasis on the “and” in the title of the World Bankreport, centres on the claim that traditional PAYG pension systems have deleterious macro-economic effects, acting as a drag on growth, demanding higher rates of tax, inhibitingsavings and investment, adding to labour costs and encouraging capital flight. By contrast,privatised systems are said to foster growth by encouraging saving and investment, reducingthe cost of capital to business, stimulating the development of capital markets andpromoting the efficient allocation of resources. If invested in the private sector, arguesEstelle James, leader of the research team that produced the report, mandatory pensionfunds are likely eventually “to dominate the ownership of financial assets that representclaims on the economy’s real assets” and this, she suggests, will tighten the stock marketdisciplines to which corporate managers are subject. Worker–investors, interested only in

Northern Ireland Legal Quarterly 62(1)

12 See R Holzmann, Reforming Public Pensions (Washington: OECD 1988), arguing that “what was only a coupleof decades ago considered as a central achievement of the welfare state is now being evaluated differently”.

13 World Bank, Averting the Old Age Crisis: Policies to protect the old and promote growth (Oxford: World Bank/OUP1994). It is not insignificant that it was only after the collapse of Eastern European Communism that theassault on public pensions began in earnest. Just as the rise of public pension provision was prompted in partby the desire to reduce support for radical working-class social movements, the growing weakness oforganised labour and elimination of the communist threat smoothed the way for its erosion.

14 See R Holzmann, “Reforming old-age pension systems in central and eastern European countries intransition” (December 1993) 7 Journal of Economics, Supplement 1, 191–218; and Orenstein, Privatizing Pensions,n. 6 above, ch. 4. When New Labour came to power in 1997, Jose Pinera, by now one of pensionprivatisation’s leading international advocates, was invited to meet the Select Committee on Social Security byFrank Field, an admirer of the emphasis private pensions put on personal responsibility: See B Jamieson,“UK’s Frank Field invites Jose Pinera”, Sunday Telegraph, 11 May 1997.

15 Orenstein, Privatizing Pensions, n. 6 above, p. 81. For a discussion of the internal World Bank debates, see ibid.pp. 80–4. See also P Orszag and J Stiglitz, “Rethinking pension reform: ten myths about social securitysystems” in R Holzmann and J Stiglitz (eds), New Ideas about Old Age Security: Towards sustainable pension systemsin the 21st century (Washington DC: World Bank 2001).

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maximising returns and minimising risk, will, through their institutional representatives, beable to monitor corporate performance and insist that efficiency and “shareholder value”are maximised.16

This economic case is rooted in the neoliberal theories of economic and socialdevelopment that rose to prominence in the 1980s and which have exerted enormousinfluence not only on policy-making but on the trajectory of legal thought and scholarship.The key supposition of these theories is that free markets know best; that private,contractual economic ordering and the “unregulated” forces of supply and demand serveto maximise not only individual freedom but efficiency, growth, wealth and welfare.17

Particular and specific emphasis is laid on the creation of open financial markets whichenable capital to move freely around the world – the so-called “efficient capital marketshypothesis”. These theories are strident in their assertion of the existence of naturallyfunctioning and naturally efficient markets.18 Indeed, it is belief in the existence of atranshistorical, beneficent, market-based, economic rationality – a rationality which tends tobe depicted as not merely politically neutral but apolitical – that underlies the concept of“the market” as an abstract, singular phenomenon. If the technical, legal, political andcultural barriers inhibiting the operation of this rationality were removed, the argumentruns, it would operate for the benefit of all.

These theories are underlain by a belief in the (potential) autonomy of “the market” and“the economic” from the legal and political, a belief reflected in the idea that states (spatiallyseparate political powers) “intervene in” and/or “regulate” markets (spatially separateeconomic spheres).19 As such they are premised on a naturalisation of markets andproperty rights; on an assumption that they somehow pre-exist law and regulation. Lawyers,of course, are, or should be, aware that this is not the case; that property and markets arelegal, political and social constructs – the products as well as the objects of regulation; andthat, as a result, not only is the goal of “deregulation” absurd,20 the dynamics andrationalities of particular markets are themselves inevitably political and legal productswhich vary according to the legal rights–obligations–regulatory structures that constitutethem.21 This is especially true of international financial markets which exist under theauthority and by permission of the state, and are conducted on whatever terms stateschoose to allow.22 Unaware of – or choosing to ignore – this, neoliberals purport to seek a


16 E James (1998) “New systems for old age security” (August 1998) 13(2) World Bank Research Observer 5–8,reprinted in S Ringen and P de Jong, Fighting Poverty: Caring for parents, children, the elderly and health (Farnham:Ashgate 1999); and World Bank, Averting, n. 13 above, pp. 208–16. Pension privatisation is thus seen asdesirable in the developing as well as the developed world. Indeed, until recently, Chile was regularly held outas a role model whose privatisation programme had “deepened the nation’s capital market . . . stimulatedeconomic growth” and helped to generate the high growth rates achieved from the mid-1980s to mid-1990s:M Skousen, EconoPower: How a generation of economists is changing the world (Hoboken: Wiley & Sons 2008), ch. 5.The slowdown which followed was portrayed by the system’s supporters as an aberration, a product of thegovernment’s “erroneous response” to the Asian crisis of 1997: J Pinera, “Retiring in Chile”, New York Times,1 December 2004.

17 See D Harvey, A Brief History of Neoliberalism (Oxford: OUP 2005). The Chicago wing of neoliberalismemphasises the efficiency benefits of markets; the Austrian wing their freedom-enhancing capacities.

18 They are said to be rooted in human nature and the natural propensity of self-interested human beings “totruck, barter and exchange” identified by Adam Smith: Wealth of Nations vol. 1, R H Campbell, A S Skinnerand W B Todd (eds) (Oxford: OUP [1776] 1976), p. 25.

19 See E Meiksins Wood, Democracy against Capitalism (Cambridge: CUP 1995).20 See D Campbell, “The end of Posnerian law and economics” (2010) 73 Modern Law Review 305, p. 326.21 See P Ireland, “Property, private government and the myth of deregulation” in S Worthington (ed.), Commercial

Law and Commercial Practice (Oxford: Hart 2003).22 See S Strange, Casino Capitalism (Oxford: Blackwell 1986), p. 29.

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“depoliticisation of economic life” and the establishment of market mechanisms in as manyspheres of social activity as possible.23

This hostility towards (certain sorts of) political intervention in the market elides into amore general hostility towards the state and collectivism,24 with states commonly beingdepicted as ineffective, predatory collections of self-seeking politicians and bureaucrats andas vehicles for special-interest groups. Indeed, as doubts grow about their powers andcapacities in a “globalised” world, many now see states as “at best as an anachronism andat worst as an obstacle to human progress”.25 While this scepticism was convenientlyforgotten when the crisis broke,26 it is rapidly re-surfacing as governments seek toimplement and justify spending cuts. Neoliberal hostility towards the state also findsexpression in its uncomfortable and ambivalent relationship with democracy.Notwithstanding the emphasis they place on the importance of individual choice andconsent, for neoliberals there are few more serious threats than democracy. Feeling unableopenly to oppose it in the same way as their nineteenth-century counterparts,27 however,contemporary neoliberals have tried instead to immunise the economy and the market fromdemocratic control. Hence the growing use (associated with the shift from “government”to “governance”) of “experts” and independent agencies,28 and the emergence of a “newconstitutionalism” which limits the power of states by granting quasi-constitutionalprotection to property interests.29 It is not insignificant, perhaps, that the first country toengage in thoroughgoing pension privatisation, Chile, was a US-backed dictatorship, northat one World Bank study concluded that one of the “most important . . . negative lessons”of pension reform (in Argentina) was that “the democratic process” tended to “dilute”reform programmes.30

DICTATORSHIP OF NO ALTERNATIVES

These ideas are illustrative of the neoliberal tendency to naturalise not only the market buta very particular model of capitalism. If the collapse of communism “seemed to confirm. . . that capitalism is the natural condition of humanity”,31 for many neoliberals the relativesuccess of Anglo-Saxon models of capitalism in the 1990s confirmed that the sociallydemocratic capitalisms of continental Europe were also being overtaken by history. Withtheir market-inhibiting economic and social arrangements, the argument runs, thesecapitalisms are economically inferior. Many on the left drew a similar conclusion,“differ[ing] from conservative and neo-conservative critics only in deriving no pleasure


23 See M Boyco, A Shleifer and R Vishny, Privatising Russia (Cambridge MA: MIT Press 1997), pp. vii, 10–11. Thisunderlies the neoliberal desire to turn as many “things” as possible into objects of private property(privatisation) capable of being transacted in markets.

24 Non-market mechanisms and institutions, like state bureaucracies, tend to be depicted as artificial, man-made,freedom-inhibiting, tendentially inefficient, market-substitutes to be deployed only in situations of “marketfailure”.

25 H-J Chang, Globalisation, Economic Development and the Role of the State (London: Zed Books 2003), p. 1.26 See, for example, Richard Posner’s sudden and extraordinary conversion to the merits of state intervention:

A Failure of Capitalism (Cambridge MA: Harvard University Press 2009); and Campbell, “The end”, n. 20above.

27 On nineteenth-century liberal attitudes to democracy, see A Arblaster, The Rise and Decline of Western Liberalism(Oxford: Blackwell 1984), pp. 75–9, 264–83.

28 On this, see B Jessop, The Future of the Capitalist State (Cambridge: Polity 2002).29 The term the “new constitutionalism” was first coined by Stephen Gill. It is discussed later in this paper.30 D Vittas, “The Argentine pension reform and its relevance for Eastern Europe”, World Bank Policy Research

Working Paper 1819 (Washington DC: World Bank 1997), pp. 8–9.31 E Meiksins Wood, The Origin of Capitalism: A longer view (London: Verso 2002), p. 1.

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from it”.32 From this perspective, the gradual evisceration of European social democracyand triumph of a neoliberal, stock- and free-market-based capitalism is more or lessinevitable, a product of inexorable, transhistorical, economic laws. As Roberto Unger says,in this seeming “dictatorship of no alternatives”, progressives have been reduced to tryingto preserve the compensatory redistributions of the welfare state and to “humanise theinevitable”.33 After the deluge, of course, even this modest project is collapsing.

As this suggests, for neoliberals there is at work a process of functional evolution inwhich “the market” acts as the mechanism of selection – a process which is thought to haveaccelerated with the growth of increasingly open, global markets.34 This idea is, of course,most easily applied to productive enterprises and, sure enough, in the 1990s, when thecapitalisms of the US and the UK were out-performing their rivals, it came widely to bebelieved that this was in part because their shareholder-oriented, stock-market-centredcorporations were economically superior to their more stakeholder-friendly rivals in placeslike Germany and Japan, leading some to suggest that we had reached “the end of historyfor corporate law”.35 For neoliberals, however, globalisation has also increased thecompetition between the legal arrangements of different societies, amplifying the“evolutionary trend towards economically more efficient legal rules”. From this perspective,states are engaged in regulatory competition to produce “efficient law” and law as a wholecan be “understood as the outcome of free competition among alternative, largelyheterogeneous suppliers of legal authority”, hence claims that law not only “determines[but] is determined by economic efficiency”.36 The concept of efficiency has thus come tobe used not only to provide “an economic commentary on the law [but] . . . an explanationof [it]”.37 Here too “old Europe”, hindered by its “legal origins” and insufficiently market-and investor-friendly civil law systems, is thought to fall short.38

LAW AND POLICY IN AN ECONOMICALLY DETERMINED WORLD

In recent decades, this economically determinist, Darwinian paradigm of development –with its curious resemblance to vulgar, base-superstructure versions of Marxism39 – hasgreatly influenced policymaking. Armed with tools which, they believe, make it possible tonot only plot how far different bodies of “real world law” deviate from “the efficientmodel” but to offer “practical directions for making laws best”,40 and firm in the belief thatthey are working with the grain of history, neoliberal policymakers in international agencieshave displayed boundless self-confidence in dispensing policy advice to transitional


32 T Judt, “Europe vs America” (February 2005) 52(2) London Review of Books 37.33 Unger, The Left Alternative, n. 5 above, pp. 1–11.34 See M Roe, “Chaos and evolution in law and economics” (1996) 109 Harvard Law Review 641.35 H Hansmann and R Kraakman, “The end of history for corporate law” (2001) 89 Georgetown Law Journal 439.

In one of his (many) moments of irrational exuberance, Alan Greenspan went even further in 1998, arguingthat American economic performance was so impressive, it was “possible we have moved beyond history”:remarks before the Joint Economic Committee of Congress, 10 June 1998.

36 See U Mattei and F Pulitini, “A competitive model of legal rules” in A Breton, G Galeotti, P Salmon andR Wintrobe, The Competitive State (New York: Springer 1991); and U Mattei and F Calfagi, New PalgraveDictionary of Economics and Law vol. I (Basingstoke: Palgrave Macmillan 1998), p. 346, at p. 351; see also Roe,“Chaos”, n. 34 above, p. 642.

37 U Mattei, Comparative Law and Economics (Ann Arbor: University of Michigan Press 1997), p. xiii; see alsoR Cooter and T Ulen, Law and Economics 2nd edn (Reading: Addison-Wesley 1996), preface.

38 See E Glaeser and A Shleifer, “Legal origins” (2002) 107 Quarterly Journal of Economics 1193–229.39 See P Ireland, “History, critical legal studies and the mysterious disappearance of capitalism” (2002) 65 Modern

Law Review 120.40 See Mattei and Calfagi, New Palgrave, n. 36 above, p. 346.

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countries.41 Neoliberal economic determinism has also greatly influenced legal scholarship,not least in fuelling a tendency to treat certain areas of law as essentially superstructural, asmere reflections or facilitators of the economic logic of “the market”. This tendency hasfound its most vivid expression in the work of the law-and-economics movement,particularly the Posnerian variety, much of which is underlain by a belief in thetranshistorical, purely economic, efficiency-maximising rationality of the “deregulated”market and in a “classical evolutionary paradigm” of legal development.42 It is also visiblein claims about “legal convergence” and the benefits of importing and imitating rules,especially in areas of law designed to facilitate trade: “legal transplants” have come to beseen as a way of accelerating evolution towards better (“more efficient”) legal rules.43

Indeed, even those who do not share the intellectual presuppositions and politicalpreferences of neoliberalism often find themselves operating within rather than against theeconomically determinist analytical framework it provides. As Unger says, erstwhileprogressives have become the “chastened votaries of their neoliberal opponents”.44 Manyof those who favour stakeholder models of the corporation, for example, attempt to defendthem on orthodox “efficiency” grounds rather than on the varied and complex grounds ofindividual and social well-being, justice, human dignity and fulfilment, and productiveefficiency more broadly defined. Indeed, as Ronald Dore observes, there is now a tendencyto view models of the corporation which do not conform to neoliberal precepts as notmerely different but “abnormal”, hence the emergence of a “US/UKnormative–Japan/Germany deviant” mindset.45 Within this framework, arrangementswhich are deemed to conform to neoliberal norms are in no need of explanation: they areassumed to be the products of natural (market) selection and the evolutionary trendtowards efficiency. It is the survival of arrangements and institutions which are deemed“abnormal” and “inefficient” that needs explaining. In this context, concepts such as “pathdependence” have been deployed to explain the survival of “sub-optimal” arrangements.Sustained deviations from the hallowed path of efficiency, the argument runs, areattributable to historical quirks and accidents, to entrenched cultural, political andinstitutional differences. Moreover, the resulting less-than-efficient arrangements cansometimes become “locked in”.46 It is also when accounting for the less-than-efficient thatpower, which is otherwise strangely absent from neoliberal explanatory frameworks, makes abelated appearance, albeit in a marginal role at the side of the stage. Thus, we have toacknowledge the possibility that “powerful interest groups” – ranging from firms, topractising lawyers, to politicians and regulators, to academics – will try to “impede the


41 This advice is, of course, associated with the so-called “Washington Consensus”.42 See Roe, “Chaos”, n. 34 above.43 See A Ogus, “Competition between national legal systems: a contribution of economic analysis to

comparative law” (1999) 48 International and Comparative Law Quarterly 405, p. 411.44 Unger, The Left Alternative, n. 5 above, p. 7.45 R Dore, “Deviant or different? Corporate governance in Japan and Germany” (2005) 13 Corporate Governance

437.46 Concepts such as path dependence – the idea that “history matters” – ostensibly soften the economic

determinism and reductionism of neoliberal theories. In many ways, however, they simply reinforce them byoffering an explanation for the contrary evidence that seems to be thrown up by empirical reality. In thiscontext, so-called comparative law and economists have developed a notion of “comparative efficiency”,drawing on the work of institutional economists like Oliver Williamson to argue that what is legally efficientmay vary according to the institutional context in which rules operate. A particular legal arrangement may notbe the most efficient one in a theoretical world, but it may well be the best that can be achieved in light of theexisting formal and informal constraints. See U Mattei and A Monti, “Comparative law and economics:borrowing and resistance” (2001) 1 Global Jurist Frontiers 5, p. 7; and U Mattei, Comparative Law and Economics(Ann Arbor: University of Michigan Press 1997).

convergence of legal principles relating to homogeneous products” for personal gain. Theywill try to maintain barriers to competition (like restrictive choice of law rules), to “imped[e]evolution towards economically justifiable common principles” and to “resist cost-reducingreforms to the law” in “rent-seeking” attempts to secure income and wealth beyond thatthey would receive in a competitive market.47

Many elements of this analytical framework have figured in the debates surroundingpension reform. Thus pension privatisation is regularly presented as the economicallyrational, most “efficient” way forward, and regimes that cling to old PAYG systems warnedthat they are putting themselves at a competitive disadvantage. Thus, the progress made bythe multi-pillar system proposed by the World Bank, Estelle James tells us, is in large partattributable to “economic forces”:

with economic growth slowing down in many countries and financial marketsopening up globally, it has become increasingly important to raise productivitythrough improved incentives in the labor market and through the accumulationof capital which is then allocated to its most efficient uses . . .

Ideas about rent-seeking and path dependence have also been deployed, with theadvocates of privatisation frequently lamenting the self-interested and economicallyirrational, “political” opposition to privatised systems. Thus, the extent to which individualcountries have maximised the privatised pillar is said to have been significantly shaped by“political” factors such as the “strength of their social security bureaucrats, pensionerorganisations and labor unions”.48

4 The ethical case for pension privatisation: towards a world ofneoliberal individuals

The case for pension privatisation rests not only on claims about its economic benefits,however, but on claims about its ethical virtues. By fostering the development of a financialproperty-owning “equity culture”,49 its advocates argue, pension privatisation discouragesdependence and encourages individual self-reliance and responsibility, expanding the realmof freedom and choice and linking benefits to contributions and work to reward. In doingso, it helps to build ownership societies composed of autonomous, hard-working, self-sufficient, intensively possessive, property-owning, neoliberal individuals.50 Thus, Pineradescribes his ideas for social security reform as “part of an overall vision of a free marketand a free society” whose goal is to enable “the whole working population [to] accumulatewealth and become shareholder-capitalists”. The intention, argues Estelle James, is to“inculcat[e] the ethos of personal responsibility and [to] mak[e] each worker a littlecapitalist . . .”51 From this perspective, pension privatisation is a development of potentiallyhistoric importance, part of a transformative “worker–capitalist revolution” which has to

Law and the neoliberal vision 9

47 Ogus, “Competition”, n. 43 above, p. 411.48 James, “New systems”, n. 16 above, pp. 9, 29–30.49 See J Poterba, “The rise of the ‘equity culture’: US stockownership patterns, 1989–1998” (2001), http://econ-

www.mit.edu/faculty/poterba/files/aca2001.pdf.50 Drawing on C B MacPherson, David Harvey argues that the 1990s saw a “huge shift in mental conceptions

of the world such that an even more intensive possessive individualism arose . . .”: Harvey, The Enigma, n. 3above, p. 132.

51 J Pinera, “The bull by the horns: the battle for Chile’s social security reform” (2009),www.hacer.org/pdf/Pinera04.pdf; James, “New systems”, n. 16 above, p. 9. “It would be naïve”, James writes,“to ignore the fact that the partial replacement of a publicly managed program by privately managed funds. . . has political and ideological implications”, for “it changes the balance of power in society, taking influenceand jobs away from bureaucrats and others who control the public programs and shifting them to privateentrepreneurs.”

overcome “philosophical” obstacles to engineer a “paradigm shift” in which collectivistideas are abandoned and replaced by ideas of individual responsibility.52

FROM “SHARE-OWNING DEMOCRACIES” TO “OWNERSHIP SOCIETIES”

In the UK, the idea that pension privatisation would help to create a new world ofownership societies and neoliberal individuals first surfaced in the rhetoric of MargaretThatcher’s government. The right-to-buy scheme introduced in 1980 contributed to a risein home ownership, and, following the privatisation of previously state-owned industriesand demutualisation of building societies, there was a significant increase in direct shareownership.53 By 1990 more than one in five households owned shares directly, comparedto less than one in ten a decade earlier. Indirect financial property ownership also increased,encouraged by the running down of the state pension and the introduction of variousinducements to private investment, leading the Conservative government to boast that itwas “taking capitalism to the people”.54 The goal, claimed Nigel Lawson, was to encouragethe creation of “an ever-widening share-owning democracy”. This was reiterated by JohnMoore, Financial Secretary to the Treasury from 1983–86, when he argued that privatisationnot only brought productive benefits but was capable of “transforming public attitudestowards economic responsibility and the concept of private property”. It was “aneducational process” through which people could grasp “the fundamental beliefs and valuesof free enterprise”.55 With its “unrivalled power to teach the responsibilities and rewards ofa free society”, privatisation was depicted in terms of moral regeneration.56

With others following the British vanguard, by the turn of the century there had beensignificant increases in stock market participation and financial property ownership in manyparts of the world.57 In the US, where public assets were sold off and private retirementsaving encouraged, 30 million Americans became stockholders for the first time between1989–99 and the number owning corporate stock, directly or indirectly, increased by nearly60 per cent.58 In similar vein, by the turn of the millennium, 17.3 per cent of householdsin France, Germany, Italy, the Netherlands and the UK were holding stocks directly. Whenindirect ownership was taken into account, the overall stock market participation rate ofhouseholds rose to nearly 50 per cent in the UK, 33 per cent in the Netherlands, 23 per centin France and 20 per cent in Germany.59 By the time Pinera met George W Bush in 1997,he was portraying pension privatisation as a “crucial element of an ownership society”.Embracing this idea, in his second inaugural speech Bush argued that to enable “citizens [to]find the dignity and security of economic independence” and to become “agents of [their]own destiny”, he would “widen the ownership of homes and businesses, retirement savings


52 Skousen, EconoPower, n. 16 above, ch. 5; Pinera, “The bull”, n. 51 above.53 See T Clarke, “The political economy of the UK privatization programme” in T Clarke and C Pitelis (eds),

The Political Economy of Privatization (London: Routledge 1993), p. 205.54 J Moore, “British privatization – taking capitalism to the people” (February 1992) Harvard Business Review 115;

See Ireland, “Shareholder primacy”, n. 10 above.55 Moore, “British privatization”, n. 54 above, p. 115.56 “Economics are the method”, Thatcher argued, but “the object is to change the soul”: quoted in J Gray,

“Thatcher, Thatcher, Thatcher” (April 2010) 32 London Review of Books 19–21.57 See L Guiso, M Haliossos and T Japelli, “Stockholding: a European comparison” in L Guiso, M Haliassos and

T Jappelli (eds), Stockholding in Europe (Basingstoke: Palgrave Macmillan 2003), p. 201.58 The development of defined contribution Individual Retirement Accounts (IRAs) and 401k plans were central

to this development: see Investment Company Institute, Equity and Bond Ownership in America (Washington: ICI2008); J M Poterba, “Stock market wealth and consumption” (2000) 14 Journal of Economic Perspectives 99.

59 See Guiso et al., “Stockholding”, n. 57 above. British households showed the highest rate of direct ownershipat 27.9%.

and health insurance”.60 It was also around this time that the ideas of “financial literacy”and “financial education” began to rise to prominence. In 2003, the OECD established anInternational Gateway for Financial Education, while the Financial Services Authority(FSA) launched its national strategy on financial capability. In a world in which governmentsare “scal[ing] back the benefits of state-supported social security programmes” and “anincreasing number of workers” are having to “rely on defined contribution pension plansand their personal savings to finance their retirement”, the argument runs, people need tounderstand finance so they can manage life’s financial risks and “take ownership” of theirfutures. In other words, they need to start thinking like investors and recognise thatachieving economic well-being in old age involves taking and managing risks.61

THE BONDHOLDING CLASS AND THE MYTH OF DEMOCRATISED WEALTH

The number owning, or possessing a beneficial interest in, financial property hasundoubtedly grown substantially in recent decades. In the US, increasing participation indefined contribution pension plans has seen the percentage of households owning stockdirectly or indirectly rise from about 19 per cent in the early 1980s to nearly 50 per cent.62

The story is similar elsewhere.63 The distribution of financial property ownership remains,however, very heavily concentrated. Indeed, in recent decades such redistributions as haveoccurred have tended to be upwards rather than downwards. In the US, for example, overone-third of total financial wealth is held by the wealthiest 1 per cent, with the nextwealthiest 9 per cent holding another third; the bottom 50 per cent hold only 3 per cent.64

The concentration of share ownership is even greater, with the wealthiest 10 per cent ofAmericans holding (directly and indirectly) over three-quarters of corporate equity and theleast wealthy half of the population holding less than 2 per cent.65 In the UK the picture isvery similar: the base of the financial pyramid has widened, but financial propertyownership remains very heavily concentrated among the very wealthy, with “extremeconcentrations” among “the wealthiest 5 to 10 per cent of households”.66 The economistRay Canterbery has dubbed this financial property-owning elite “the bondholding class”.67

Pension privatisation and the spread of financial property ownership cannot, therefore,be said to have democratised wealth or generated the emergence of genuine ownershipsocieties, even in the developed world. There is, however, clear evidence that they haveprompted a shift in attitudes along the lines hoped for by John Moore. It is not insignificant


60 See Orenstein, Privatizing Pensions, n. 6 above, p. 1; and S Soederberg, Corporate Power and Ownership inContemporary Capitalism (Routledge: Abingdon 2010), p. 27. According to Bush, “self government relies, in theend, on the governing of the self ”. The creation of such an “ownership society”, the Cato Institute observed,required that more Americans be given “an opportunity to invest in stocks, bonds and mutual funds so thatthey too c[ould] become capitalists”: see D Boaz, “Defining an ownership society”,http:www.cato.org/special/ownership_society/boaz/html.

61 See “Round-table discussion on financial literacy”, New Statesman, 9 January 2006.62 It reached 49.5% in 2002, before falling back slightly to 47% in 2008: Investment Company Institute and

Securities Industry Association, Equity Ownership in America (Washington DC: ICI/SIA 2002); InvestmentCompany Institute, Equity, n. 58 above.

63 See Guiso et al., “Stockholding”, n. 57 above.64 See A Kennickell, “A rolling tide: changes in the distribution of wealth in the US, 1989–2001” (2003) SCF Web

www.federalreserve.gov/pubs/oss/oss2/scfindex.html; J Poterba, “Stock market wealth and consumption”(2000) 14 Journal of Economic Perspectives 99.

65 See Ireland, “Shareholder primacy”, n. 10 above.66 See J Banks, Z Smith and M Wakefield, “The distribution of financial wealth in the UK”, Working Paper 02/21

(London: IFS 2002); Ireland, “Shareholder primacy”, n. 10 above.67 E R Canterbery, Wall Street Capitalism: The theory of the bondholding class (London: World Scientific Publishing

2000). His “bondholding class” encompasses bondholders and stockholders, p. 7.

that when Lawrence Mitchell, a leading academic critic of existing American corporategovernance practices, asks “who is the stockholder?”, he answers “you and me”.68 Thespread of financial property ownership, part of the more general “financialisation of themasses”, has fostered a belief that “we’re all (more or less) shareholders now”, or soon willor could be. This has proved to be of considerable ideological and psychologicalsignificance, encouraging more and more people to think of themselves as middle class andas having a vested interest, albeit a modest one, in the performance of the corporate sector,financial markets and fictitious capital. This is reflected in the increasing media prominencegiven to financial news as indicator of the health and well-being of society as a whole.69

Equally importantly, perhaps, with the growth in what Richard Minns has called “socialsecurity capital”, there has emerged a new culture of dependency, as a growing number ofworkers look to, and rely on, the performance of financial markets and publicly listedcorporations for security in old age.70 These developments have played an important rolein garnering support for, and legitimating, shareholder value-oriented corporations and theprioritisation of investor protection as a policy goal.

THE RISE OF THE SHAREHOLDER VALUE CORPORATION

There is general agreement that in the post-war period, when organised labour was relativelystrong and a mixture of shareholder dispersal and capital controls undermined the powerand influence of financial interests, corporations became less single-mindedly shareholder-oriented. By the 1950s, even in the US and the UK, where the principle of shareholderprimacy was well established, it was widely believed that corporate managers were using thediscretion they had acquired over the determination of corporate goals to balance a rangeof different interests, rendering corporations more “socially responsible”.71 Certainly,workers qua workers did relatively well during this period, as reflected in falls in the levelsof income and wealth inequality. From the 1970s, however, as the power of organisedlabour waned, financial property owners began to re-unite in institutions (including pensionfunds) and were liberated from the constraints imposed by Bretton Woods. Acting throughtheir institutional representatives, they started to become more active, both withincorporations and in financial markets. With the rise of the hostile takeover, emergence ofan active market for corporate control and growing use of executive share options andother performance-related forms of remuneration, share price became a central focus ofmanagement. If in the 1960s and 1970s firms had, by their own accounts, been relativelyinsulated from investor preferences, by the 1990s they had become intensely sensitive tothem. With corporate strategies increasingly tied to a narrowly financial view of how firmsshould be run, the maximisation of “shareholder value” emerged as the overridingcorporate goal. Shareholder primacy had been reasserted with a vengeance.

The rise of the shareholder value corporation has brought significant benefits to a few.With managers under pressure to raise the market value of their corporations and to


68 L Mitchell, Corporate Irresponsibility (New Haven: Yale University Press 2001), pp. 147–8.69 The bondholding class, Canterbery argues, has “revamped the indicators of economic well-being” and

“redefined progress to benefit mostly themselves”: Wall Street, n. 67 above, p. 8.70 See R Minns, The Cold War in Welfare (London: Verso 2001); Soederberg, Corporate Power, n. 60 above, p. 36.71 The emphasis that some still placed on “the profit-making element in corporate activity”, the leading post-war

British company lawyer L C B Gower argued in 1955, had “a slightly old-fashioned ring”: L C B Gower, “Bookreview of Emerson and Latcham, Shareholder Democracy” (1955) 68 Harvard Law Review 922. On the sociallyresponsible corporation, see C Kaysen, “The social significance of the modern corporation” (1957) 47American Economic Review 311; and T Nichols, Ownership, Control and Ideology: An inquiry into certain aspects of modernbusiness ideology (London: George Allen & Unwin 1969). The resulting dilution of the principle of shareholderprimacy was widely thought defensible as corporations resembled social or quasi-social institutions rather thanpurely private enterprises, while shareholders looked less and less like proper owners.

distribute a larger proportion of profits as dividends, the share of national income accruingto financial property owners rose across the OECD.72 In the US, as the policy of “retainand invest” was replaced by one of “downsize and distribute”, the proportion of post-taxincome distributed to shareholders significantly increased.73 In the UK, there was an evenmore marked upward shift in pay-outs from 13 to 20 per cent in the 1980s to 20 to 35 percent in the 1990s and early 2000s.74 Further shareholder gains followed the rises in thestock-market value of shares, though many of these proved transient. These benefits notonly came at the expense of labour, which suffered as corporations downsized, outsourcedand “re-engineered”, but were concentrated among the bondholding class and a coterie ofcorporate executives and financial intermediaries. The losses suffered by workers quaworkers significantly outweighed the gains they made as worker–capitalists.

Shareholder value corporations have nevertheless been vigorously defended, though notso much on the problematic basis of shareholder corporate ownership as on the basis oftheir superior efficiency.75 In this regard, the arguments made for shareholder valuecorporations echo those for made for pension privatisation. Claims that they operate for thebenefit of society as a whole have, of course, been given further credence by the growth inprivate pensions and emergence of workers as small-scale investors. Thus, in seeking toaccount for the growing support for shareholder-oriented corporations, Hansmann andKraakman, in their neoliberal tour-de-force announcing the “end of corporate history”,point not only to the “important economic forces” operating in their favour but to the rapidexpansion of equity ownership and emergence of a “public shareholder class”. EchoingPinera, they argue that with “even blue-collar workers now often hav[ing] sufficient personalsavings to justify investment in equity securities . . . labor and capital no longer constituteclearly distinct interest groups in society”.76

THE PRIORITISATION OF INVESTOR PROTECTION

The claim that shareholder value corporations and open financial markets operate tomaximise efficiency, wealth and welfare, coupled with the feeling that “we’re all (more orless) shareholders (or potential shareholders) now”, has also helped to legitimate thegrowing prioritisation by policymakers of property protection and particularly theprotection of vulnerable intangible property forms like intellectual and financial property.In recent decades, ensuring the integrity of financial property – investor protection – hasbecome one of the principal policy goals of governments, routinely trumping othereconomic and social objectives. Nowhere has this been clearer than in the policy responsesto both the initial financial crisis and the subsequent crises in sovereign debt, where theoverriding concern has been to try to ensure that financial property owners continue to


72 G Epstein, “Introduction”, and G Epstein and A Jayadev, “The rise of rentier incomes in OECD countries”,both in G Epstein (ed.), Financialization and the World Economy (Cheltenham: Edward Elgar 2005).

73 W Lazonick and M O’Sullivan, “Maximising shareholder value: a new ideology for corporate governance”(2000) 29 Economy and Society 13.

74 J Froud, S Johal, A Leaver and K Williams, Financialization and Strategy: Narrative and numbers (London:Routledge 2006), pp. 68, 87–8.

75 Legally speaking, it is very difficult to sustain the “ownership” claims of the shareholders of large publiclyquoted corporations: see P Ireland. “Defending the rentier: corporate theory and the reprivatization of thepublic company”, in J Parkinson et al. (eds), The Political Economy of the Company (Oxford: Hart 2001), p. 141.

76 Hansmann and Kraakman, “The end of history”, n. 35 above. This class, they argue, operates as a coherent,“broad and powerful interest group in both corporate and political affairs across jurisdictions”. The newChilean pension system was inaugurated on Labour Day, 1 May 1980, to highlight that in a free-marketeconomy the interests of capital and labour are “convergent”: see Skousen, EconoPower, n. 16 above, ch. 5.

receive their revenues whatever the cost. As we have seen equally clearly, however,protecting financial property is not easy.

This is because the value of intangible financial property is derived not from itsphysical properties but from its anticipated future earning power.77 As such, its value isinherently speculative,78 rendering it unusually vulnerable not only to fraud, bubbles andthe manipulation of expectations, but to changes in trade and labour regimes, in financialand taxation policies, as well as in general economic conditions and the balance of politicaland class power. It is a high maintenance property form, the preservation of whoseintegrity and value demands an extraordinarily wide range of legal and other interventionsaimed at ensuring that the revenues continue to flow.79 Indeed, it was the desire to hedgeand spread the risks associated with financial property that prompted some of the financialinnovations – securitisation, credit default swaps and the like – which Alan Greenspanthought had made “individual financial institutions . . . less vulnerable to shocks [and] thefinancial system as a whole . . . more resilient”, but which we now know exacerbated thescale of the collapse.80

The growing importance attached to investor and financial property protection isevident in the macro-economic focus on low inflation,81 in the growing willingness ofboth states and international organisations to act as financial firefighters, as well as in therise of regulatory bodies, such as the FSA, and rapid growth in laws regulating securitiesand capital markets.82 It is also evident in the emergence of a complex transnationalframework aimed at securing the interests of investors and of foreign investors inparticular. In recent years, for example, international institutions have prioritised thecreation of “good climates for investment”, identifying 12 areas where “standards areimportant for the institutional underpinning of macroeconomic and financial stability”and developing universal standards of “good governance” in each.83 The OECD’sPrinciples of Corporate Governance, for instance, seek to embed the Anglo-Americanshareholder-oriented model of the corporation around the world and to protect theinterests of rentier shareholders. Although compliance with these standards is formallyvoluntary, in reality it is more or less compulsory if capital flight and investment strikes areto be avoided.84

At the same time a new transnational “investment rules regime” has been constructed.Embodied in a variety of legally binding agreements, ranging from bilateral investmenttreaties to regional trade agreements to multilateral instruments, this regime providesvarious legal protections to foreign investors. In addition to insisting on non-discriminationand fair and equitable treatment, it inhibits certain sorts of state interventions, prohibiting


77 More specifically, from a capitalisation of the returns which are expected to accrue to it in the future.78 This is most obviously true of corporate shares, the rate of return on which is not usually fixed in advance

but varies according to the profitability of the company. More recently, however, the uncertainties haveencompassed the sovereign debt of a growing number of countries.

79 See P Ireland, “Property and contract in contemporary corporate theory” (2003) 23 Legal Studies 453. AsGillian Tett observes, it is not for nothing that the root of the word credit comes from the Latin credere,meaning to believe: see “Lost through creative destruction”, Financial Times, 10 March 2009.

80 A Greenspan, speech to American Bankers Association Annual Convention, New York, 5 October 2004.81 See Canterbery, Wall Street, n. 67 above: “Because of the bondholders’ primal fear of inflation, monetary

policy has had a strong anti-inflationary, anti-growth, and anti-employment bias”, p. 7.82 Exemplified by things such as the EU’s Markets and Financial Instruments Directive of 2004: see N Moloney,

How to Protect Investors: Lessons from the EC and the UK (Cambridge: CUP 2010).83 See the Financial Stability Board, Compendium of Standards, available at www.financialstabilityboard.org/

index.html.84 On this see S Soederberg, The Politics of the New Financial Architecture (London: Zed Books 2004).

not only measures that “directly or indirectly” expropriate investment interests (such asnationalisation) but so-called “creeping expropriations” or “regulatory takings” – stateinterventions, like corporate or environmental regulations, that adversely impact on thevalue of investments. With investors increasingly being given standing to sue if theirinvestments are damaged, states are becoming more constrained not only by fears of capitalflight but by the threat of litigation.85 This “interlocking network of rules and rule-makingstructures” thus offers investors quasi-constitutional protections, insulating them from “thevicissitudes of democratic politics”.86 This “new constitutionalism”87 locks countries intoa new “rule of (investment) law” which not only protects foreign investors from legislativeand administrative actions that damage their investment interests but confers oninternational organisations powers which, when exercised by states themselves, are usuallyreferred to as “sovereign powers”.88

In this context, as in others, the gulf between neoliberal rhetoric and neoliberal practiceis palpable. As many have observed, you simply cannot understand the changes in the globalfinancial markets since the early 1970s in terms of deregulation. On the contrary, financialmarkets have become increasingly heavily regulated. Indeed, modern American financialmarkets are probably “the most highly regulated markets in history if regulation is measuredby volume (number of pages) of rules . . . and by extent of surveillance”, and “possiblyeven by vigour of enforcement”.89 In pursuit of investor protection, states have endorsedextensive (regulatory) interventions in some areas, while at the same time reducing,discouraging and prohibiting them in others.

5 The neoliberal vision unravels

PENSION PRIVATISATION, CORPORATE GOVERNANCE AND FINANCIALISATION

Has pension privatisation delivered on its promises? Despite the claims made in its favour,there is little evidence that pension privatisation has fostered economic growth. This isnot, perhaps, surprising, for, as John Eatwell observes, “exhaustive studies have identifiedno impact of increased personal savings on the rate of investment”.90 The growth inpension saving has, however, undoubtedly fuelled both increased investment in the claimson productive activity (in financial property) and the growth in financial transactions andfinancial markets. In doing this, it has contributed less to economic growth than to theprocesses whereby, to use Keynes’ phrase, “speculation has come to dominate

85 In both domestic courts and international tribunals: See D Schneiderman, Constitutionalizing EconomicGlobalization: Investment rules and democracy’s promise (Cambridge: CUP 2008); D Schneiderman, “Investment rulesand the new constitutionalism” (2000) 25 Law and Social Inquiry 757; D Schneiderman, “Constitutionalapproaches to privatization: an inquiry into the magnitude of neo-liberal constitutionalism” (2001) 63 Law andContemporary Problems 83; D Schneiderman, “Investment rules and the rule of law” (2001) 8 Constellations 521.

86 See Schneiderman, “Investment rules and the rule of law”, n. 85 above, p. 522; Schneiderman,Constitutionalizing Economic Globalization, n. 85 above, pp. 3–4; see also R Hirschl, “The political origins of thenew constitutionalism” (2004) 11 Indiana Journal of Global Legal Studies 71–3. See also D Sarooshi, InternationalOrganizations and their Exercise of Sovereign Powers (Oxford: OUP 2005).

87 A term coined by Stephen Gill: see his “Globalisation, market civilisation, and disciplinary neoliberalism”(1995) 24 Millennium: Journal of International Studies 399–423; and “The constitution of global capitalism” (paperpresented at the ISA Annual Convention, Los Angeles, 2000).

88 See Schneiderman, “Investment rules”, n. 85 above (2001); and also Sarooshi, International Organizations, n. 86above.

89 D MacKenzie, “Opening the black boxes of global finance” (2005) 12 Review of International Political Economy569. See also Campbell, “The end”, n. 20 above, p. 324.

90 This leads him to conclude that “all those arguments about the need for society to save more are quite simplypoppycock”: J Eatwell, “Three fallacies on pensions” (2003), www.cerf.cam.ac.uk/publications/files/Eatwell-%20pensions%20crisis.pdf.


enterprise”.91 There is equally little evidence that the growing power of pension funds andother institutional investors has generated significant productive benefits at the level ofthe individual corporation. On the contrary, while it has helped to ratchet up the financialand capital market pressures on managers, this has merely served to reinforce theirobsession with share price and other financial indicators of performance. With more andmore securities analysts providing institutions (including pension funds) with informationon which to base their decisions, corporations have become increasingly concerned withkeeping the expectations of analysts in line with their own forecasts, constructingplausible narratives about their strategy and performance and delivering numbers whichcorroborate their stories, even if this entails using accounting and revenue manipulationsof various sorts.92

In similar vein, while the takeovers associated with the market for corporate controlhave brought quick and plentiful gains for their organisers and target companyshareholders, the overall verdict of studies of their long-term impact on corporateperformance is generally negative. A significant proportion of the profits generated byhostile takeovers, including those associated with the private equity inspired boom of recentyears, have been derived from asset stripping aimed at boosting short-term yields and atcreating the illusion of improved productivity, rather than genuine improvements in outputand productivity.93 As Froud et al. observe, “for all its prestige” the business model ofprivate equity firms “is almost exactly like used-car trading”, where capital is borrowed, carspurchased and cosmetically fixed up, before being resold for a quick profit.94 Endorsing thisview, Robert Peston emphasises the need to distinguish private equity firms from “realventure capitalists” and “genuine entrepreneurs”. The former, he argues, tend to view firms“in a very impersonal and blinkered fashion”, as “property and chattels, and statistics aboutcash flows and market shares” rather than as productive enterprises. They are, he concludes,better at financial engineering than successfully running businesses in the long-term,showing “little empathetic understanding of a business as a social institution whollydependent on its people”. Indeed, for workers, their activities are often disastrous, as theyruthlessly sweat all assets, human as well as capital.95

As this suggests, the effects of the growing capital market pressures on corporateculture have been considerable. Many non-financial corporations have become quasi-financial corporations and more and more corporate managers have begun to behave likefinancial market participants who see their enterprises as little more than financial flows andbundles of assets capable of being bought and sold at will. Production is often increasinglyincidental to the much more lucrative business of “balance-sheet restructuring”.96 It ishardly surprising that many think the growing focus on “shareholder value” has had acorrosive effect on productive performance and on innovation. Nor that many believe the


91 J M Keynes, The General Theory of Employment, Interest and Money (London: Macmillan 1936): “Speculators maydo no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomesthe bubble on a whirlpool of speculation.” More generally, see J B Foster, “The financialization ofaccumulation” (October 2010) 62(5) Monthly Review.

92 See Froud et al., Financialization, n. 74 above.93 S Konzelmann, F Wilkinson and M Fovargue-Davies, “Governance, regulation and financial market instability:

the implications for policy” (paper delivered to Re-engineering the Corporation Seminar, Birkbeck College,26 March 10), pp. 15, 19.

94 Froud et al., Financialization, n. 74 above, p. 122.95 R Peston, Who Runs Britain? (London: Hodder 2008), pp. 13–14, 22, 44–5, 59–61, 96. Paradoxically, corporate

raiders of this sort have often found willing allies in pension fund managers seeking to maximise returns fortheir (worker) investors.

96 J Toporowski, “The wisdom of property and the politics of the middle classes”, (2010) 62(4) Monthly Review.

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growing bias towards quick short-term gain rather than new, long-term productiveinvestment has seen resources poorly allocated from a productive and social perspective. Inrecent years, more and more businesspeople, journalists and academic commentators haveexpressed concern about the largely negative effects of an increasingly financialisedgovernance culture.97

PENSION PRIVATISATION AND THE FINANCIAL CRISIS

Pension privatisation has also failed to deliver a world of “ownership societies”. Evenbefore the recent financial crisis, pensioner poverty around the world was rising, especiallyamongst women, and private pension schemes were facing serious financial difficulties. Inthe UK between 1992 and 2004, the coverage of workers by final salary, defined benefitschemes – theoretically less vulnerable to stock market volatility than their definedcontribution counterparts – fell from 21 per cent to 9 per cent. Since then, many suchschemes have reported massive funding shortfalls; by 2008 only one in five were still opento new members.98 As a result, British workers are increasingly relying on definedcontribution schemes, many of which are themselves in difficulty. In March 2009, ananalysis of market returns by PwC suggested that people who had been paying into suchschemes for 20 years were no better off than they would have been had they left theirmoney in cash savings accounts.99 It is a similar story elsewhere. In Chile, for example,dissatisfaction with the privatised system emerged as a key election issue in 2006 and inArgentina in 2008, in a measure which commanded widespread popular support, thegovernment nationalised its private pension funds, prompting the OECD to fret that othersmight follow Argentina’s lead.100

The financial crisis has greatly exacerbated these problems, “wreak[ing] havoc onretirement plans of all varieties”, particularly employer-based and private retirement savingsschemes.101 The market value of and returns accruing to many forms of financial propertyhave fallen, slashing the value of pension pots and generating (or amplifying) pension fundshortfalls. Many who thought they had provided for comfortable retirements are having tothink again. Many of the companies sponsoring defined benefit plans have becomeinsolvent; many others have closed their schemes and are now cutting their contributions tothe defined contribution schemes which replaced them. In recent months. UK public sectorpensions, many of which offer only very modest retirement incomes, have come under


97 See, for example, J Crotty, “The neoliberal paradox: the impact of destructive product market competition and‘modern’ financial markets on nonfinancial corporation performance in the neoliberal era”, in Epstein,Financialization, n. 72, p. 77. By 2007, even Martin Wolf, erstwhile champion of free markets and globalisation,was worrying about the effects of “unfettered finance” and arguing that the new “global financial capitalism”had brought “the triumph of the global over the local, of the speculator over the manager and of the financierover the producer”: M Wolf, “The new capitalism”, Financial Times, 19 June 2007; “Risks and rewards oftoday’s unshackled global finance”, Financial Times, 27 June 2007.

98 See R Minns, “Missing the point” (paper delivered to Financial Institutions and Economic SecurityConference, May 2009).

99 Worse still, people who had been paying in for only 10 years would now be holding less in their retirementaccounts than the total value of their contributions, see Financial Times, 3 March 2009.

100 Since their creation in 1994, the privately owned funds had saved 96,000 million pesos for retirement accountswhile pocketing 36,000 million pesos in fees. See P Antolin and F Stewart (2009), “Private pensions and policyresponses to the financial and economic crisis”, OECD Working Paper on Insurance and Private Pensions No 36(France: OECD), p. 5, regretfully reporting that “there are policy discussions about reverting back towardsPAYG public pensions in some central and Eastern European countries”.

101 C O’Murchu et al., “The pensions crisis”, 27 May 209, FT.com, video and audio interactive graphics. Mattershave been made worse by the fact that in many countries government debt has mushroomed and both futurepension savings and future government revenues are being adversely affected by falling profits and risingunemployment.

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fierce attack from both politicians and the press for being too generous (“gold-plated”),prompting the government to inflation-link them not to the retail prices index but to thehistorically lower consumer prices index; a similar change to the inflation indexing ofprivate pensions has been announced. Even die-hard supporters of pension privatisation,usually noted for their sublime optimism, have conceded that “the financial turmoil and theensuing financial crisis have had a major impact on private pension assets”. The OECDestimates that there were declines of between 20 and 25 per cent (over $5 trillion) in globalpension assets during the course of 2008 alone.102

FETISHISED MONEY: THE PENSIONS ILLUSION

In short, the financial crisis has highlighted the fundamental flaws in a pensions policy whichrelies on mass ownership of rentier financial property, making it painfully clear that privatepensions are incapable of providing security in old age for more than a privileged minority.It has exposed the neoliberal vision of a world of classless ownership societies populatedby autonomous, self-reliant, financial property-owning worker–capitalists as a chimera basedon a series of misconceptions about the nature of financial property and money.

These misconceptions loom large in the work of those advocating pensionprivatisation. The World Bank, for example, regularly equates increased pension saving withincreased productive investment, and stock market growth with economic growth. “Real”investment in productive enterprise is muddled up with investment in the claims on theproduct of such enterprise. Growth in the volume and value of interest- and dividend-bearing financial property and in the size of financial markets is treated as synonymous withgrowth in real productive assets and capacity. This reflects the deeply rooted tendency,endemic to modern capitalism, to treat money and financial property as somehowautonomously productive, as if financial property were capable of making more money byitself. This tendency surfaces when advocates of “ownership societies” suggest that pensionprivatisation will prevent the old from becoming a burden on the state and futuregenerations. If everyone saved more and there was a move from PAYG towards fullyfunded pensions, they suggest, the younger generation would be relieved of the burden ofsupporting the old, for the latter would be able to live off the revenues accruing to theirfinancial property. Even those critical of pension privatisation tend to make thisassumption. Thus, Orenstein argues that, while privatised pension systems face certain riskssocial security systems do not, under privatised systems the demographic risks to whichsocial security systems are vulnerable are “substantially reduced, because pension benefitsdo not rely on the earnings of another generation”.103

There have been few better expressions of the fetishised view of financial propertyunderlying these ideas than an advertisement which appeared in the UK in the 1980s.Depicting a man lying on a sofa, it declared that, contrary to appearances, he was workingbecause he had been wise enough to invest in a particular financial institution. As a resulthis money was not only working for him but doing so incessantly because it “never slept”;it was always earning interest and dividends. On the face of it, the man was self-reliant anda burden on no one. In reality, of course, money is not autonomously productive and evenif the sofa-bound man was not working, someone, somewhere was and it was theseunknown others who were generating the wealth to which the man was entitled to lay(partial) claim by virtue of his financial property ownership.


102 See Antolin and Stewart, “Private pensions”, n. 100 above. The falls have been especially large in countries,such as the US, where portfolios contain a higher proportion of equities.

103 Orenstein, Privatizing Pensions, n. 6 above, p. 184.

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The reality is that no matter how much financial property (money) they own, the old arealways ultimately drawing, one way or another, on the labour of those who work. As JohnEatwell observes, people’s standards of living are sustained by a flow of goods and services,which during their working lives is usually sustained by paid work. After retirement the flowcan be sustained by either squirreling away goods and services and then graduallyconsuming them – a method with serious drawbacks, not least because many services, suchas health care, simply can’t be stored – or by acquiring monetary claims – revenue rightsderived from either financial property and/or public pensions – which can be used as andwhen needed to purchase the goods and services being produced by the current workforce.Either way, the provision of goods and services for the old always involves anintergenerational transfer.104 No matter how pensions are financed, the old are alwaysdrawing on the productive activities of the young, always making claims on the product ofthe labour of others. Even private pensions involve intergenerational transfers.

The unavoidable dependence of the non-working old on goods and services producedby current workers prompts Eatwell to argue that “in overall macro-economic terms” thereis no difference between PAYG and so-called fully funded, privatised pension schemes so faras overall intergenerational transfers are concerned. “The burden on the current workforce,defined as the goods and services that are ‘extracted’ from them, is exactly the same” underboth systems. Privatised schemes simply extract the resources in a different way, though indoing so they alter the distribution of goods and services between pensioners, favouringthose who have invested in financial property. Comparisons between the two schemes must,therefore, be made on other grounds and in this regard, Eatwell suggests, fully funded,privatised schemes suffer from “rather weighty disadvantages”, most notably their regressiveimpact on the distribution of pensioner income105 and high administration costs. PublicPAYG pension schemes are simple, transparent and have administration costs of only 3 to4 per cent, compared to 20 per cent or more for the typical private scheme.106 This leadsAntonio Tricarico to conclude that the “single-mindedness of the World Bank in promotingprivatised systems has been peculiar, since the evidence – including that documented inWorld Bank publications – has indicated that well-run public sector systems, like the socialsecurity system in the US, are far more efficient than privatised systems”.107

Eatwell is similarly sceptical of claims that by encouraging investment and capitalmarket development privatised pensions foster good corporate governance and theefficient allocation of resources. “Whilst it may be possible to argue that the existence offully funded schemes promotes the development of financial markets”, he argues, “there isno clear relationship between the growth of financial markets and aggregate savings growthor economic efficiency”.108 On the contrary, as we have seen, the growing power offinance has fostered the development of highly financialised and dysfunctional forms ofcorporate governance. As many commentators have pointed out, world growth rates havefallen during the neoliberal era, from an average of 4.8 per cent between 1960 and 1980 to


104 J Eatwell, “The anatomy of the pensions crisis” in UN Economic Commission for Europe, Economic Survey ofEurope No 3 (Geneva: UNECE 1999). As Morris Cohen observed: “The owners of revenue-producingproperty are in fact granted by the law certain powers to tax the future social product.”: “Property andsovereignty” (1927-28) 13 Cornell Law Quarterly 8, p. 13.

105 Between classes and between men and women.106 Eatwell, “The anatomy”, n. 104 above.107 See A Tricarico, in Social Watch Report 2007 (Montevideo: Instituto del Tercer Mundo 2007). The fees and

commissions associated with privatised systems come directly out of the money that retirees would otherwisereceive, “lowering their retirement benefits by as much as one third compared to a well-run public socialsecurity system”.

108 Eatwell, “Three fallacies”, n. 90 above, and “The anatomy”, n. 104 above.

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2.9 per cent between 1980 and 2000; growth in labour productivity fell from 2.5 per centto 0.8 per cent during the same period.109 “Perhaps the greatest advantage of fully-fundedschemes”, Eatwell concludes, is that they generate “an automatic adjustment of the level ofpensions to the available resources” without any need for an “overt political decision”.Pensioners may be disappointed with their pensions, but “they do not perceive anydeliberate political decision in the reduction of their pensions by inflation or by the failureto attain a suitable return in the financial markets”. In other words, private pensionsdepoliticise the level of provision.110

THE CLASS DIMENSIONS OF FINANCIAL PROPERTY AND INVESTOR PROTECTION

As Eatwell’s comments suggest, the advocates of pension privatisation tend to overlook notonly the intergenerational dimensions of all forms of pension provision, but the classdimensions of all forms of financial property. The latter were implicitly recognised byAristotle, Aquinas and other early critics of usury when they argued that money isinherently sterile and unproductive and that all interest payments therefore inevitably entailtransfers, in money form, of part of the product of one person’s labour to another. Theusurer, like the man on the sofa, makes money by taking, in the form of interest, part ofthe product of someone else’s labour. When the rise of capitalism generated thedevelopment of an increasingly sophisticated and complex credit system and a hugeexpansion in the forms and volume of interest-bearing revenue rights, Marx saw in themodern owner of financial property, the money capitalist, a contemporary and class-basedversion of the usurer. For Marx, the only significant difference between the usurer’s capitaland the interest-bearing capital of the money capitalist lay not in their form (both entail amovement from M-M1) but in the social and class relations within which the money moved.Crucially, he argued, although the revenues accruing to money capital are all ultimatelyderived from the exploitation of labour and the appropriation of surplus value in theprocess of production, under capitalism money appears to be autonomously productive,“a mysterious and self-creating source of interest”. It was because the revenues accruing tomoney capital seemingly presupposed no production at all (M-M1) that Marx considered itto be the most fetishistic form of capital of all.111

Marx did not, however, anticipate the growing integration of the working classes intofinancial relations. Recent decades have seen the rise of working-class ownership offinancial property as well as a massive growth in working-class consumer and household(including mortgage) debt and the consequent re-emergence of new, highly developedforms of usurer’s capital.112 With the rise of “equal opportunities financialisation”,mainstream financial institutions have “moved into areas they had previously redlined” andadopted a similar position “vis-à-vis the poor [as] the loan sharks and illegal lenders whoserole reformers had sought to undercut”.113 In an increasingly insecure world of stagnatingreal wages and diminishing public provision, the desire of people to participate in theownership society and to find security through asset ownership has been ruthlessly


109 World Bank, World Development Indicators (Washington DC: World Bank 2005).110 Eatwell, “Three fallacies”, n. 90 above.111 Karl Marx, Capital, vol. 3, chs 25 and 29. See also Rudolf Hilferding, Finance Capital (1909)112 “It was the usurious and exploitative character of lending to wage-earning households, as it developed in the

concrete setting of rising inequality and privatization of the past three decades, that made it highly profitable.”:see P dos Santos, “At the heart of the matter: household debt in contemporary banking and the internationalcrisis”, Research on Money and Finance Discussion Paper 11 (London: SOAS May 2009), p. 28.

113 L Panitch, M Konings, S Gindin and S Aquanno, “The political economy of the subprime crisis” in L Panitchand M Konings (eds), American Empire and the Political Economy of Global Finance (Basingstoke: PalgraveMacmillan 2008), p. 253, at pp. 264, 268, 285.

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encouraged and exploited. Indeed, the whole sub-prime superstructure rested on predatorylending and regular payments of interest by the poor. Through processes of this sort, muchprofit-making and surplus labour extraction in the developed world has come to centre ondebt rather than exploitation in production itself. Thus, one of the most significant aspectsof recent changes in banking activities has been the shift in focus from productiveenterprise towards the individual wage income of ordinary people as sources of profit.114

The result of these processes has been the emergence of a growing number ofworker–capitalists, of people who straddle the class divide in that they are simultaneouslyboth workers, part of the product of whose labour is appropriated either in production orthrough debt, and the owners of (small amounts of) financial property which entitles themto receive interest payments on retirement. There is thus more than a little truth in theclaims that what we have seen in recent years is not only the financialisation of society butthe financialisation of class power.115

These developments have blurred class divisions but done little to eradicate them. Aswe have seen, while privatisation and pension privatisation in particular have undoubtedlywidened financial property ownership, they have done little to change its distribution.Indeed, the alleged democratisation of financial property ownership and widening of the“community of money” has been accompanied by growing income and wealth inequalities.The significance of this was highlighted by the German economist Margrit Kennedy whenshe calculated the interest paid and interest received by the 10 income deciles of theGerman population. The bottom eight deciles all paid more in interest than they received;the ninth received slightly more than it paid and the tenth (and richest) received about twiceas much as it paid. Much of the interest gain was concentrated in the top 1 per cent. This,she suggested, “explains graphically, in a very simple and straightforward way, why the richget richer and the poor get poorer”.116

As a result of the sharply skewed distribution of financial property ownership, the riseof the shareholder value corporation and growing policy focus on investor protection havebrought substantial benefits to the bondholding class but few benefits to anyone else. Aswe have seen, even for those privileged members of the working class with privatepensions, financial property ownership does not guarantee a financially secure retirement.For the much more numerous, less privileged, non-financial-property-owning members ofthe global working class the benefits have been even harder to discern. Indeed, as we haveseen, the impact of the growing financial power on the lives of workers qua workers hasbeen extremely damaging. Wage bills have been cut, real wages have stagnated, jobinsecurity has increased, long-hours cultures have emerged, and working practices andlabour markets have been made more “flexible”.117 As Doug Henwood says, workers havebeen asked “to trade a few extra percentage points return on their pension fund, on whichthey may draw some decades in the future, for 30 or 40 years of falling wages and risingemployment insecurity”.118


114 dos Santos, “At the heart”, n. 112 above, pp. 5–7. Costas Lapavitsas calls the extraction of financial profitdirectly out of the personal income of workers “financial expropriation”: see his “Financialised capitalism:crisis and financial expropriation” (2009) 17 Historical Materialism 114.

115 Panitch et al., “Political economy”, n. 113 above, at p. 257.116 M Kennedy, Interest and Inflation Free Money (Philadelphia: New Society Publishers 2005).117 In the words of one commentator, the “serial restructuring” which has accompanied the worship of

shareholder value has “elevate[d] breach of implicit stakeholder contract into a guiding principle ofmanagement”: Froud et al, Financialization, n. 74 above, pp. 109–36.

118 D Henwood, Wall Street (London: Verso 1997), p. 293.

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As noted earlier, however, other elite groups have also benefited from financialisation.Pension privatisation, for example, has been very good for financial institutions, generatingall manner of fees and commissions. At the time of the 2006 Chilean election, the privatelyrun pension funds had over a five-year period recorded average annual profitability of morethan 50 per cent. A World Bank study concluded that they were retaining between a quarterand a third of workers’ contributions in commissions and fees.119 In similar vein, lendingin the US sub-prime debacle was driven less by the realistic ambitions of poor people tobecome homeowners and more by predatory money-making by banks. Mortgage lendersbegan to do everything they could to sign up borrowers at above average, sub-prime interestrates, intending to pool, securitise and sell the debt on as tranches of various grades ofcollaterised debt obligation.120 In the corporate context, the most visible beneficiaries offinancialisation have been corporate executives, whose remuneration has skyrocketed, oftenwithout any meaningful connection to performance. There have been unprecedentedincreases in executive–worker compensation ratios, especially in places such as the US andthe UK.121 Many other less visible groups have also benefited from these developments –a diverse bunch of corporate advisors and service providers, securities analysts, hedge-fundoperators, private equity firms, city lawyers, and investment banks. Some of them are largelyreactive, responding to corporate demands; others are proactive deal-makers, activelyinitiating mergers, acquisitions and financial innovations.122 These groups have a stake in an“economy of permanent restructuring”, making money from advising, trading, dealing andinvesting, from acquisitions and de-mergers, new issues, buybacks, securitisation and the re-bundling of risks. Indeed, they have been largely responsible for the hyper-innovation thathas produced billion-dollar turnovers in capital market dealings.123 They also, some argue,helped to develop the idea of “shareholder value” to justify their self-serving activities.124

In short, financialisation has generated the emergence of “new layers of rentiers” who profitfrom financial expropriation, drawing substantial incomes from their positions within thefinancial system rather than from direct ownership of financial property.125

Crucially, these various elite groups, whose interests are by no means entirely co-extensive or harmonious, now wield, as various commentators have observed, considerablepolitical power and have come in many places to dominate the state itself. In the UK, forexample, the City has been given more or less everything it wants by successivegovernments. “Guiltlessly rapacious and mentally pugnacious”, writes Hywel Williams:

Britain’s financial and business elites at least display the virtue of candour abouttheir ultimate goals: the making of money for themselves . . . The City has wonall the necessary battles for command and control. It now absorbs and directs theaims of all other power elites and thereby makes those elites subordinate to itsown interests.126


119 “Chile’s candidates agree to agree on pension woes”, New York Times, 10 January 2006.120 J Lanchester, Whoops (London: Allen Lane 2010), p. 103.121 The 1990s, with its bull-market, is often portrayed as a decade in which managers armed with stock options

heroically created value for shareholders, but in reality they were for the most part simply enrichingthemselves: Froud et al, Financialization, n. 74 above, pp. 54–64, 94

122 I Erturk, S Johal, A Leaver and K Williams, Financialization at Work (London: Routledge 2008), pp. 26–9.123 P Folkman, J Froud, S Johal and K Williams, “Working for themselves?: capital market intermediaries and

present day capitalism” (2007) 49 Business History 552; see also F Dobbin and D Zorn, “Corporate malfeasanceand the myth of shareholder value” (2005) 17 Political Power and Social Theory 179.

124 D Zorn, F Dobbin, J Dierkes and M S Kwok, “The new new firm: power and sense-making in theconstruction of shareholder value” (2006) Nordiske Organisationsstudier 3.

125 See Lapavitsas, “Financialised capitalism”, n. 114 above, p. 114.126 H Williams, Britain’s Power Elites (London: Constable 2006), p. 215; See also Peston, Who Runs Britain?,

n. 95 above.

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In innumerable ways and innumerable areas, from education to health to welfare,“bottom-line City imperatives have been transplanted wholesale into British society”.127

Indeed, it is difficult to imagine a more powerful testament to the growing power (andprioritisation of the interests) of the bondholding class and these financial elites than therecent bail-outs and enforced austerity. States have, in effect, decided that. as far as possible,ordinary people, rather than the bondholding class, should suffer the consequences.128

6 Neoliberalism in the age of austerity

NEOLIBERALISM AS A CLASS PROJECT

Neoliberalism presents itself as committed to “rolling back the state”, as wanting to allowfree rein to the market. This has led many commentators to depict the current crisis as acrisis of deregulation and a very particular Anglo-American model of capitalism and to seeka solution in more and better regulation, in regulatory reform and a redrawing of theboundaries between state and market. While there is some truth in this view, it takesneoliberalism’s ideological self-representation too seriously. Neoliberalism has indeedentailed some deregulation, not least in the financial sphere, but, in general, what we haveseen in recent decades is not so much a retreat as a major change in the nature and formsof state activity.129 In many spheres, there has been a marked increase in interventionism,not only by states but by international agencies, much of it, as we have seen, directed atcreating “good climates for investment”. The financial crisis occurred in a heavily regulatedworld and those who seek to understand the neoliberal era only at the ideological level, interms of its self-professed determination to free markets from states, will struggle to makesense of actual neoliberal practice.

To understand the gulf between neoliberal practice and rhetoric, it is to the classdimensions of neoliberalism and financial property that one needs to turn. This is not tosay that all the policy changes associated with the neoliberal revolution can directly oradequately be grasped through a simple class prism. As the intellectual grip of neoliberalideas has tightened, they have taken on a life of their own. However, as a number ofcommentators have argued, many aspects of the neoliberal revolution are best understoodas parts of a class project which emerged out of “the long downturn”, the decline in growthrates and rate of return on capital investment which began in the 1960s and saw a significantfall in the share of the social product accruing to financial property owners.130 From thisperspective, its deregulatory dimension, such as it is, has entailed not so much a withdrawalof the state from economic affairs as a state-led restructuring of economic life. Manyneoliberal policies have sought to reshape, in favour of capital, what Robert Hale called the“structures of mutual coercion” which characterise all markets. Law has been central to thisproject, for, as Hale observed, the legal rights possessed by market actors are key


127 D Kynaston, City of London: A club no more vol. 4 (London: Chatto & Windas 2002), p. 791.128 See E Moya, “How the bond vigilantes punished the sick men of Europe”, The Guardian, 18 November 2010.

As Moya points out, the bond vigilantes who are exerting the market pressures which are promptinggovernments to slash spending and jobs are (paradoxically) primarily pension funds. She concludes that “thevigilantes are now arguably more powerful than governments”, inevitably bringing to mind Bill Clinton’srhetorical question: “You mean to tell me that the success of the economic program and my re-election hingeson the Federal Reserve and a bunch of fucking bond traders?”

129 B Jessop, The Future of the Capitalist State (Cambridge: Polity 2002).130 See Harvey, A Brief History, n. 17 above; R Brenner, The Economics of Global Turbulence (London: Verso 2005);

R Brenner, “Interview” (March–April 2009) Against the Current, issue 139; R Brenner, “What is good forGoldman Sachs is good for America” (Los Angeles: UCLA, Institute for Social Science Research, April 2009);G Dumenil and D Levy, Capital Resurgent (Cambridge MA: Harvard University Press 2004).

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determinants of the coercive power they can exercise.131 Put simply, in recent decades thecoercive power of capital has been greatly enhanced by (amongst other things) multipleextensions to its legal rights, while the coercive power of labour has been undermined andcurtailed by (amongst other things) a steady erosion of its legal rights at both the individualand collective levels. These changes in the “structures of mutual coercion” have generatedmajor shifts in the balance of class forces, in the distribution of the social product and inthe economic dynamics of contemporary capitalism.132 While they have been depicted asthe natural products of economic evolution (or market forces), in reality many of them havebeen rooted in fundamentally political decisions to alter the prevailing structures of rightsand power.133 Hidden behind the free-market rhetoric of irresistible economic imperativeshas lurked a ruthless political project designed to restore wealth and power to a few.

THE RISE OF BUBBLENOMICS

In certain respects this project has been successful. The emergence of a neoliberal orderunder the aegis of finance has destroyed the old social compromises and greatly weakenedthe power of labour. Huge new, amorphous, unorganised, increasingly feminised, easilyexploited proletariats have been created, job security reduced and social protection systemsweakened, The result of these and the other changes to the “structures of mutual coercion”,including those effected through law, has been downward pressure on wages, a markedredistribution of the proceeds of industry from labour to the bondholding class and to smallelites in industry and finance,134 and a sharp reversal of the trend towards greater equality.135

In other ways, however, the strategy has failed, doing little to eradicate the structuralproblems facing contemporary capitalism. The interconnected problems of over-accumulation, overcapacity and underconsumption – what David Harvey calls “the capitalsurplus absorption problem”136 – remain unresolved. There remains a serious shortage ofoutlets for profitable investment in real productive activity. Since the 1980s, stagnation hasbeen gripping the capitalisms of the developed world, with economic performance in theUS, Western Europe and Japan steadily deteriorating in terms of standard economicindicators such as gross domestic product (GDP), investment and real wages. Despite the“greatest government sponsored economic stimulus in US peacetime history”, the businesscycle that began in 2001 and ended in 2007 was the weakest of the post-war period: GDPgrowth was slow and private sector employment barely shifted.137 Paradoxically, this was inpart because by holding down wages demand was depressed, exacerbating the chronic,systemic tendency towards overcapacity which has been dogging manufacturing industry


131 R L Hale, “Coercion and distribution in a supposedly non-coercive state” (1923) 38 Political Science Quarterly 470.

132 See Ireland, “Property”, n. 21, above.133 See R Helleiner, States and the Re-emergence of Global Finance (New York: Cornell University Press 1994), arguing

that most accounts of the globalisation of financial markets and demise of Bretton Woods downplay the roleplayed by states.

134 As Robert Reich says, the “restructuring” which has gone on within corporations has often entailed “nothingmore than redistributing income from employees to shareholders”: R Reich, Harper’s Magazine, May 1996.

135 This trend began in the 1930s and continued to the end of the 1970s. By the turn of the millennium, however,inequality was returning to the levels of the pre-1914 period.

136 Harvey, The Enigma, n. 3 above, p. 45137 Brenner, “What is good”, n. 130 above.

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worldwide.138 It is in the attempts to overcome these problems that we can locate some ofthe roots of financialisation and of the financial crises which have afflicted capitalism withincreasing regularity.

Since the beginning of the long downturn, governments have regularly responded tothese problems by fostering debt-financed demand. Initially, traditional Keynesianism andpublic borrowing were deployed, but from the 1990s, beginning in the US but spreadingelsewhere, governments moved towards more balanced budgets and began to use privateborrowing by households and corporations as alternative sources of economic stimuli. Atthe same time, asset bubbles were nurtured to suck up surplus capital by creating newinvestment and profit-making opportunities in financial activity. The “wealth effect” ofthese bubbles made possible still further borrowing by corporations and householdsbenefiting from increased paper wealth. In the late 1990s, this “asset-price Keynesianism”centred on the explosion in equity prices associated with the dot.com bubble and the allegedrise of a “New Economy”. When this particular bubble burst, a new one was nurtured,centred on housing and leveraged lending. Interest rates were kept low to encourageborrowing, and in the US in particular the authorities pressed credit card companies todevelop colour- and gender-blind risk models which created equal opportunities to becomeindebted, turning a blind eye to increasingly lax lending practices and mortgage lendingstandards. This pseudo-democratisation of credit, debt and (share and house) ownership,which emerged as a sort of alternative social welfare programme, was portrayed bygovernments as a positive step in the direction of ownership societies.

In many places, of course, the result was rapid rises in the price of residential property,accelerated in the US by the sub-prime super-booster. With annual house price increasescoming to be seen as normal, households were prompted to engage in yet more borrowingon the back of the bubble-inflated value of their homes. From the mid-1990s private debtrelative to national income rose rapidly.139 This not only helped to keep many economiesafloat but, coupled with the intensification of labour and increase in two-earner households,enabled workers to maintain or even raise their living standards despite increasingly stagnantreal wages. It also created a false sense of prosperity and helped to build positive politicalsupport for the ruling neoliberal ideas of the age. Financial markets and increasing debt thusacted as both mechanisms for disciplining workers and mechanisms for socialintegration.140 In addition to contributing to the titanic growth of multi-layered debt, theresidential property bubble also underpinned new financial bubbles, for the transformationof the prospective income streams created by debt – whether from mortgages or creditcards or student loans – into financial property (“securitisation”) acted as a basis for furtherextensions of credit. Sub-prime mortgages could be issued (originated), bundled together(securitised) and sold on (distributed). Moreover, the risks associated with them could, itseemed, not only be spread but engineered away through the use of financial innovationssuch as credit default swaps (CDSs). For the financial institutions concerned, it was


138 It is because of the conflict between the need for lower real wages to restore profitability and the need forhigher wages to restore demand (coupled with the problem of over-indebted households) that some arepessimistic about the prospects of a rapid, market-based recovery: see dos Santos, “At the heart”, n. 112 above.

139 J B Foster and F Magdoff, “Financial implosion and stagnation”(November 2008) Monthly Review 6–7; see alsodos Santos, “At the heart”, n. 112 above.

140 “Constrained in what they could get from their labour”, Panitch et al. observe, “US workers were drawn intothe logic of asset inflation . . . not only via the institutional investment of their pensions, but also via the onemajor asset they held (or could aspire to hold) . . . their family home”. In the US, “high levels of consumptionwere sustained by the accumulation of household debt and the intensification of family labour (more familymembers working longer hours under more severe conditions subject to the growing discipline of having tomeet debt payments”: Panitch et al., “Political economy”, n. 113 above, p. 264.

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extraordinarily lucrative business and from the late 1990s their profits headed off into thestratosphere.141 At the same time more and more hitherto non-financial corporationsbecame quasi-financial entities. In recent decades, in the absence of sufficient outlets forprofitable investment in real productive activity, “profit-making [has come to] occurincreasingly through financial channels rather than through trade and commodityproduction”.142 Pension privatisation, by adding to the growing volume of capital seekingoutlets, played a part in fuelling these processes.

For institutional investors, operating in an increasingly competitive environment, thesenew forms of financial property were manna from heaven. Faced by modest rates of returnon relatively low-risk financial property forms and desperately searching for higher yields,institutions began to stretch the boundaries of risk and speculation ever further, pouringmoney into exotic financial instruments and securities like those backed by American sub-prime mortgages. Indeed, in his testimony before the Angelides Commission, AlanGreenspan suggested that the crisis was as much a product of greedy investors (especiallyin Europe) searching for high-yielding bonds as it was of the misguided policies of the Fed,greedy bankers or fraudulent American mortgage lenders.143 Even allowing for the blame-shifting here, there is no doubt that the near-insatiable appetite of investors for thesesecurities made it possible for banks to lend to ever-poorer borrowers. We now know, ofcourse, that the banks held on to a large number of them themselves, often via the rapidlyrising “shadow banking system”, so that when the crash came they were on the books ofinstitutions across the world. As dos Santos observes, “the very idea that defaults on homemortgages would have wiped out leading international financial institutions, and triggered aworldwide recession, would [previously] have been unthinkable”,144 but not only hadeveryday life been increasingly “financialised”, Wall Street had become “more and moredependent on the mundane world of US mortgage and consumer debt”: the worlds of highand low finance, of finance and poverty had become entwined.145 The supporters ofpension privatisation were thus quite right when they argued that it would “spur financialmarket development by creating demand for new financial instruments and institutions”,146

but quite wrong to think that this financial innovation would promote “market completion”and a superior, more perfect form of free-market capitalism. As Lord Turner recentlyobserved, much of the financial innovation was “of little value” and “socially useless”.147

THE END OF NEOLIBERAL HEGEMONY?

The US housing bubble deflated when mortgage interest rates increased and marginalborrowers, “pressed against the limits of continually increasing working hours”,148 foundthemselves unable to meet their debt repayments. As foreclosures rose, the income streamswhich gave value to these mortgage-backed securities evaporated, as did the balance sheetsof many financial institutions. It was no longer possible to conceal the fact that theballooning and increasingly speculative financial superstructure had seriously outgrown the


141 See Foster and Magdoff, “Financial implosion”, n. 139 above, p. 7.142 G Krippner, “The financialization of the American economy” (2005) 3 Socio-Economic Review 173.143 “Blame Europe, former Federal Reserve boss tells US enquiry into financial crisis”, The Guardian, 7 April

2010. Europe means here primarily Germany. The commission, which was otherwise known as the FinancialCrisis Inquiry Commission, was set up by the US government to investigate the causes of the financial crisis.

144 dos Santos, “At the heart”, n. 112 above, p. 4.145 See Panitch et al., “Political economy”, n. 113 above, p. 253.146 James, “New systems”, n. 16 above, p. 7.147 Lord Turner, interview with Prospect magazine, 27 August 2009; see also P T Larsen, “Bank regulation needs

straightening out”, Financial Times, 30 March 2009.148 Panitch et al., “Political economy”, n. 113 above, p. 270.

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productive base. The crisis was, however, only the latest in a series, from the third-world debtcrisis of the 1970s and 1980s, to the US savings and loans scandal, to the “historic mis-allocation of capital” of the dot.com bubble.149 The new financialised, neoliberal capitalismhas since its inception been characterised by unpredictable currency fluctuations, recklesscapital movements, asset bubbles, growing financial instability and regular financial crises. Itis the sheer scale of the current crisis that is unprecedented and it was this that promptedsome to herald it as marking the beginning of the end for neoliberalism.

It is worth remembering, however, that the East Asian crisis of 1997–98 also promptedtalk about the end of neoliberal hegemony and need to build a “new international financialarchitecture”. In the event, however, it was contained in the periphery and attributed tofaults in the countries affected, in particular their “crony capitalisms”. Instead offundamental change, we saw the development of global standards of “good governance”aimed principally at creating a sounder platform for further financialisation, holding out tocompliant developing countries the promise of foreign capital and to Western investors thepromise of new, secure investment outlets. By contrast, the current crisis struck at theheartlands of global capitalism, initially propelling everyone from finance ministers tocentral bankers to investors into a state of dazed confusion.150 Since then, however, theruling elites have regained their bearings and set purposively about patching the system up.Indeed, the responses of governments have laid bare not only the sheer economic andpolitical power of finance but the degree to which neoliberal ideas, policies and practiceshave become institutionally and culturally embedded.

In the corporate governance context, for example, while there have been mutteringsabout executive pay and the “dumb” idea of shareholder value,151 there are a few signs thatthe financialised, Anglo-American, shareholder-oriented model of the corporation is goingto be abandoned. The OECD, for example, concedes that the crisis has highlighted variouscorporate governance weaknesses, but argues that there is “no urgent need” to revise itsPrinciples, merely a need to ensure their better implementation.152 The OECD has alsomade it clear that, although the stock market bounce of 2009 recouped less than half of theinvestment losses suffered in 2008,153 it does not intend to abandon pension privatisation.The crisis may have “severely dented the confidence of investors in many countries in DC[defined contribution] schemes” and caused some to “retreat from pension privatisation”,but the OECD’s firm recommendation is that governments “stay the course”.154 Indeed,the organisation’s great fear is that some countries, especially in Central and EasternEurope, might follow the Argentinian example and turn back towards PAYG public pensionschemes when the need is for more not less to be invested in private pensions to close the


149 Brenner, “What is good”, n. 130 above, p. 29.150 “Our world is broken – and I honestly don’t know what is going to replace it”, declared Bernie Sucher, head

of Merrill Lynch’s operations in Moscow. “The compass by which we steered as Americans has gone.”: G Tett,“Lost through creative destruction”, Financial Times, 10 March 2009.

151 In an interview with the Financial Times, reported on 12 March 2009, Jack Welch, the celebrated former headof General Electric stated that “on the face of it, shareholder value is the dumbest idea in the world”. Thisview was endorsed by Lambert, “Does business have a role?”, n. 2 above.

152 OECD, Steering Group on Corporate Governance, “Corporate governance and the financial crisis”,24 February 2010.

153 OECD (July 2010) Pension Markets in Focus, issue 7. Pension fund assets, it reports, were “struggling” to returnto pre-crisis levels. Moreover, “new challenges” were appearing: the onset of retirement of the baby-boomgeneration, uncertainty over the strength of the economic recovery, the weakness of public bond markets andpossible regulatory changes.

154 Antolin and Stewart, “Private pensions”, n. 100 above, pp. 2, 5.

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“retirement savings gap”.155 Governments need to “expand coverage among middleincome workers and low earners” and to ensure that “the general public . . . [is] betterinformed on the virtues and challenges of their pension system”. Investors need to“become more conscious of the risks they face” and to adopt more “suitable” strategies.156

Quite what this means is unclear. On the one hand, some are admonished for incurringlarge losses by putting too many eggs into the equity basket (presumably in an attempt toclose the retirement savings gap), while others are admonished for being “excessivelyconservative” and engaging in “too little equity and foreign investment”.157 The OECD, itseems, thinks people need to learn to gamble more skilfully. The UK is also sticking withpensions privatisation and is currently trying to reinvigorate pension saving by compellingemployers to automatically enrol employees into workplace pension schemes or the newNational Employment Savings Trust (NEST) and to make 3 per cent contributions.Introducing private pensions to low and middle income earners, argues Pensions Minister,Steve Webb, constitutes a “social revolution”.157a The crisis does not, then, appear as yet tohave significantly eroded belief in the key tenets of neoliberal ideology, at least amongstpolicymakers in the advanced capitalist economies of North America and Europe.158 Isthere nevertheless, as some have suggested, a legitimation crisis looming?

Support for, or acquiescence in, the changes associated with the neoliberal revolutionhas been garnered in many ways. The idea that it is pointless trying to resist the irresistibleeconomic logic of the market has been relentlessly promoted. Rather than futilely standingin the path of the juggernaut of history both individuals and countries have been urged toaccept the imperatives of the market, to adapt, and to make themselves more competitive.The idea that the economic logic of the market is beneficent, encouraging individual self-reliance and responsibility, creating new opportunities for the exercise of individualfreedom, and operating to ensure that resources are efficiently allocated and aggregatewealth and welfare maximised, has also been endlessly promoted. As we have seen, thepopular attraction of this curious mix of choice and no choice – of compulsion combinedwith freedom and aspiration – has been strengthened by the propagation of a vision ofincreasingly inclusive, free, wealthy, market-based ownership societies in which everyoneeither is, or can reasonably aspire to be, a financial property- and home-owning member ofthe middle class. Widening home- and share-ownership have been presented asdemocratising initiatives which create bonds between divergent interests; as homogenisingand harmonising measures which eradicate class difference.159 In this context, investorprotection has been presented as something which is both necessary and of benefit to thesocial whole and not merely the bondholding class.

This vision has unravelled. The financial crisis has not only exposed the chimericalnature of the attempt to create ownership societies populated by worker capitalists, it has


155 Prior to the onset of the crisis, they argue, some countries were already failing to accumulate a sufficientlylarge asset pool to cover the retirement savings “gap” caused by falling public pension benefits.

156 OECD, Private Pensions Outlook 2008 (Paris: OECD 2008) pp. 1–4.157 Thus, “pension fund risk management needs to be strengthened to reduce exposure to unduly risky

investments”, while the conservative post-crisis “shift in asset-allocation patterns” is identified as a particularproblem, for risking “locking in portfolio losses and could reduce the potential of funds to generateretirement incomes in future”: Antolin and Stewart, “Private pensions”, n. 100 above, pp. 2–4.

157a See S Webb, “Pensions revolution is a social landmark”, The Independent, Raconteur section, 28 February 2011.158 The story is rather different in other parts of the world such as South America.159 Soederberg, Corporate Power, n. 60 above, pp. 27, 90–110.

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brought the “golden age of home ownership” to an end.160 If, as Fiona Haines suggests,the promise of future prosperity is, ideologically, often more important than its fulfilment,not least by rendering present deprivations palatable, this unravelling might provesignificant.161 Much will turn, of course, on how people experience and interpret the ageof austerity. Will they simply accept it and adapt to falling living standards, economicstagnation, uncertain futures, and poorer and later retirements, particularly if financialinstitutions, corporate executives and other financial intermediaries continue to reap largeand disproportionate rewards? Will it be possible to convince people that (neoliberal)capitalism is good for them and not just a small, wealthy elite, no matter how stark thecontrast between the socialisation of risks and losses and the continuing privatisation ofprofits? Is it going to be possible to construct a new, positive vision of future prosperity?162

RETHINKING REGULATORY REFORM

At the moment, all that seems to be on offer is a vision of unevenly shared sacrifice drivenby the irresistible imperatives of “the markets”.163 The coalition government does not denythat policy mistakes were made – on the contrary, the profligacy of the previousadministration have been emphasised, as has the need for regulatory reform – but arguesthat there is now little or no room for manoeuvre. The path of future policy is to asignificant extent dictated by economic imperatives – and in particular, of course, by thedemands of financial markets and bondholders.

This economically determinist view urgently needs to be challenged, for it is stiflingconsideration of the enormous range of policy options and institutional arrangementswhich are available. We need to dispel the idea that there exists a universal, apolitical, purelyeconomic rationality (that of the market) which cannot be resisted and the idea that the goalof policy should be regulatory reforms aimed at correcting “market failures” and at creatingperfectly functioning markets. We need instead to recognise that the allegedly inexorableeconomic forces before which we are being asked to bow are themselves in significant partlegal and political constructs. Legal scholars are unusually well placed to do this, for, asnoted earlier, they are, or should be, aware that “there is really no such thing as a freemarket”;164 that “a market cannot be defined except with reference to the specificrights/obligations structure that underpins it, and that since these rights and obligations aredetermined through a political process . . . all markets have a fundamentally politicalorigin”.165 Markets are legal, political (and, therefore, regulatory) products, not spontaneouslyarising, pre-regulatory, pre-legal and pre-political phenomena which are merely subjected toregulation. They are or should also be aware that the property rights underpinning market


160 In commenting on their report, “Widening the rental housing market” (August 2010), Sarah Webb, ChiefExecutive of the Chartered Institute of Housing said that “a golden age of home ownership” was “comingto an end”.

161 F Haines, “Socializing economic relationships in the context of the financial and climate crises: what canregulation offer?” (paper delivered to Socializing Economic Relationships: New perspectives and methods foranalysing transnational risk regulation, workshop held in Oñati, Spain, June 2010).

162 The political importance of such a vision was implicitly recognised by Ed Miliband when he sought to depictthe Labour Party as the party of “optimism” in his conference speech in September 2010.

163 An important distinction is to be drawn, Haines argues, between aspirational sacrifices and imposed sacrifices,“Socializing”, n. 161 above.

164 H-J Chang, 23 Things They Don’t Tell You about Capitalism (London: Allen Lane 2010), p. xvi.165 H-J Chang, “An institutionalist perspective on the role of the state: towards an institutionalist political

economy” in Chang, Globalisation, n. 25 above, pp. 98–9.

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exchange are themselves regulatory products, contingent bundles of rights which can, havebeen, and are legally constituted in many different ways.166

It also means recognising that all property rights, including financial property rights, aresources of power and that the precise content of these rights bundles – theirpolitical/legal/regulatory constitution – is, therefore, vitally important, a key determinant ofthe power their holders can exercise. Markets are not neutral spaces for social interaction,but sites in which often very unevenly distributed power is exercised.167 Even in a so-calledfree-market society, what appear to be (and are presented as) the objective outcomes ofimpersonal markets are, in fact, significantly shaped by certain (explicit and implicit) politicaland legal decisions about property rights and other legal entitlements.168 These decisionsshape the different rationalities by which different markets operate and are crucialdeterminants of the distribution of the social product. From this perspective, the growingpower of financial interests which underlies the neoliberal revolution is in significant part aproduct of enhancements to the bundles of rights possessed by financial property owners,not least their right to move freely around the world (financial liberalisation) and to claimprotection from state interventions that diminish their value, even if democraticallymandated (the new constitutionalism). In an extreme example of “regulatory capture”, thebondholding class and various financial elites have established favourable newrights–obligations structures and then sought to create level playing fields (“free” markets)in which those rights can be coercively exercised. They have “shaped the environment for[their] own convenience”, and in doing so laid claim to a growing share of the socialproduct.169 Aided by the notion that money makes more money by itself, at no cost toanyone, policies which benefit a few have been passed off as both inevitable and as sociallybeneficial. In seeking to account for many of the legal and other developments associatedwith the neoliberal revolution (including the pre-occupation with investor protection),therefore, we need to move power from the margins to the centre of the stage. Thesedevelopments and, indeed, the bail-outs are much better understood when viewed througha prism of (class) power than through a neoliberal prism of “deregulation”, “efficiency” and“market imperatives”. In reality, far from marking a hallowed path to growth anddevelopment, financial liberalisation has simply paved the way for new forms ofexploitation, imperialism and socio-economic inequality.

While the current thirst for regulatory reform should, therefore, be welcomed, we needradically to rethink what it entails. At present the term “regulation” tends to be used in away which assumes that both property rights and markets are spontaneously arising, naturalproducts which somehow pre-exist regulatory intervention. Regulation is portrayed as


166 See, for example, A M Honore “Ownership” in A G Guest (ed.), Oxford Essays in Jurisprudence (Oxford:Clarendon 1961); see also Ireland, “Property”, n. 21 above. This is unusually clear in respect of the intangiblerights to receive future revenues (the financial property forms) that lie at the heart of contemporary capitalismand the current crisis. With financial property, there is no concrete object of property independent of law towhich the rights relate; the very “thing” that is owned is a legal construct, even if once constituted it tends totake on a reified life of its own. These property forms are regulation all the way down.

167 Soederberg, Corporate Power, n. 60 above, p. 28.168 See Chang, “An institutionalist perspective”, n. 165, pp. 94–5: “The establishment and distribution of property

rights and other entitlements that define the endowments that neoclassical economics take as given”, Changobserves, “is a highly political exercise”, from which he concludes that “all prices are political”.

169 Canterbery, Wall Street, n. 67 above, p. 5. Indeed, in constructing these new forms of financial power Westernlaw has performed the miracle of enabling the “rich, developed, and often ex-colonial states . . . to . . . continueextracting wealth from the poorest countries” in an era of apparent de-colonialisation. Gun-boat diplomacyand costly imperial administrations have largely (though not entirely) been replaced by other, less militaristic,less politically overt, purely “economic” modes of extraction: see W Mansell, “Legal aspects of internationaldebt” (1991) 18 Journal of Law & Society 381.

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something which is imposed on them from the outside, rather than as something intrinsicto them, something which actually constitutes them. As a result, many regulations are notseen or acknowledged as such, but treated as natural, as having a pre-regulatory existence,and removed from the arena of regulatory reform.170 If we are to tackle the problems wenow face, these invisible regulations need to be identified and opened up for debate. Itshould be recognised that states determine the bundles of rights held by financial propertyowners and the terms on which international financial markets operate, and the idea ofregulatory reform should be widened to encompass consideration of them. Rather thanbeing treated as unchangeable and unchallengeable natural givens, these bundles of rightsneed openly to be recognised as social artefacts, subjected to critical analysis and, ifnecessary, to reform. Regulatory reform should not concern itself only with investorprotection and creating a more secure environment for financialisation, but withconsideration of the proper ambit and scope of investors’ rights and, indeed, obligations.The present (socially constructed) rights–obligations structures systematically favour theinterests of the bondholding class to the disadvantage of everyone else.171

There is a precedent, for this is, in effect, what happened at Bretton Woods. Both JohnMaynard Keynes and Harry Dexter White, the principal architects of the system, wanted tosecure for governments the right to control their domestic capital markets and to preventinternational capital from “operat[ing] against what the government deemed to be theinterests of any country”. They wanted, in particular, to protect newly emerging welfarestates from capital flights induced by a desire to evade the “burdens of social legislation”,and to promote “genuine new investments for developing the world’s resources”.172

Bretton Woods thus promoted the free trade of goods within a restrictive and decidedlyil liberal set of international financial arrangements characterised by fixed exchange ratesand extensive capital controls. In restricting and regulating the international movement ofcapital, both Keynes and White acknowledged that they were limiting the bundles of rightspossessed by financial property owners and thus significantly diminishing their marketpower.173 As White observed, the new system would mean “less freedom for owners ofliquid capital” and place “restriction[s] on the property rights of the 5 or 10 percent ofpersons in foreign countries who have enough wealth or income to keep or invest some ofit abroad”.174 In similar vein, Keynes recognised that the implementation of the accordwould precipitate “keen political discussions [about] the position of the wealthier classes


170 See Chang, 23 Things, n. 164 above, pp. 1–10.171 As dos Santos observes, amongst other things they permit lenders to realise “high effective interests rates”,

underpinning the sustained high profitability enjoyed by financial intermediaries lending to ordinaryconsumers, “At the heart”, n. 112 above, p. 6.

172 E Johnson and D Moggridge (eds), The Collected Writings of John Maynard Keynes vol. 25 (London: Macmillan1980), p. 17. Keynes favoured “legitimate capital movements”. According to Helleiner, Bertil Ohlinsummarised the views of many international economists in 1936: “There is a decisive difference between therole of such transfers [capital movements] and the functions of an exchange of commodities. The latter is aprerequisite of prosperity and economic growth, the former is not.”: Helleiner, States, n. 133 above, pp. 33–8.

173 The goal, in the words of Henry Morgenthau, American Treasury Department Secretary, was to “drive themoneylenders from the temple of international finance”: Helleiner, States, n. 133 above, p. 4.

174 H D White, “Preliminary draft proposal for a UN stablization fund (April 1942)”, in J Keith Horsfield, TheInternational Monetary Fund 1945–65 vol. 3: Documents (Washington: IMF 1969), pp. 66–7.

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and the treatment of private property”.175 Both believed that the control of capitalmovements was a prerequisite of effective domestic economic and social management.

The desire to make finance servant rather than master176 lies behind not only the callsfor the establishment of a Bretton Woods II, but many of the other reform proposalswhich have surfaced in recent months – for the paring down of shareholder rights(introducing minimum ownership periods before shares accrue voting rights, forexample),177 for the imposition of greater restrictions on takeovers, for the introduction ofmaximum executive–worker remuneration ratios, for Tobin-style taxes, and so on. Anyproposals which diminish the rights and privileges of the bondholding class will, of course,be highly controversial and fiercely contested. As J A Hobson observed during thedepression of the 1930s, any political changes which entail changes to property rights tendto be portrayed by property owners as outrageous, wicked and wrong, infringements ofnatural rights and freedoms. It is, he suggested, for this reason that academics andpolicymakers are reluctant to subject property and property rights to the rational scrutinyto which they subject other social institutions. The “refusal to apply clear reasoning tounveil the defects of political and economic institutions, and the . . . class distinctionsassociated with them”, Hobson argued, “is in some measure due to the stubborn objectionof rationalists to apply to property, income, profit, and other economic concepts the samerelentless logic they apply to [other] concepts”.178 Given the seriousness of the situation inwhich we currently find ourselves, it is precisely clear reasoning of this sort that we need.

Even before the current debacle, belief in the virtues of neoliberalism (and pensionprivatisation) persisted not because of the results it had delivered but because of thepressure exerted in its favour by financial elites, their representatives in powerful nationaland international agencies, and academics and policymakers seduced by simplistic theoriesabout the benefits of so-called free markets and free financial markets in particular.179 Thecrisis presents an opportunity to challenge not only the intellectual hegemony of these ideasand their false claims about the nature of markets, but the debilitating economicdeterminism and distorted and obfuscatory efficiency-based explanatory and normativeframeworks which have underlain so much recent legal scholarship. It presents us, in otherwords, with an opportunity to re-orient and re-enrich that scholarship, to reconnect it withthe vital and complex issues of productive efficiency, justice, ethics and human well-beingwith which law and regulation should be concerned, and to recognise that the range ofinstitutional possibility is far greater than we have been led to believe.


175 Letter to Roy Harrod, 19 April 1942, Johnson and Moggridge (eds), Collected Writings, n. 172 above, pp. 35,149. Keynes was not opposed to finance per se, differentiating the active financier who sensed opportunitiesfor investment in particular productive sectors from the parasitic coupon-clipper (whom he described as aninvestor without a function) living off interest payments and dividends. For the latter he advocated euthanasia,slow death through declining interest rates.

176 In Lawrence Kraus’ words, Bretton Woods assigned to finance a kind of “second class status”, see Helleiner,States, n. 133 above, p. 5.

177 In the speech cited earlier (“Does business have a role?”, n. 2 above), Richard Lambert cited with approvalDave Packard’s suggestion that shareholders should settle for an “adequate profit”.

178 J A Hobson, Confessions of an Economic Heretic (London: Allen & Unwin 1938).179 On this, see Charles Ferguson’s revealing film, Inside Job (2010).

32

Gordian knots in Europeanised private law:unfair terms, bank charges and

political compromisesJAMES P DEVENNEY*

Durham University

NILQ 62(1): 33–55

Introduction

In recent years there has been a significant amount of public concern in the UnitedKingdom about the charges levied by banks on personal account holders in respect of

unauthorised overdrafts (and similar charges1).2 Indeed, it would appear that many of theseaccount holders made complaints about such charges to the Office of Fair Trading (OFT).3Moreover it seems that “many thousands”4 of these account holders have challenged suchcharges on the ground, inter alia, that they are unfair for the purposes of the Unfair Termsin Consumer Contracts Regulations 1999 (the Regulations),5 the regulations which, as iswell known, seek to transpose the (minimum harmonisation) EC Council Directive93/13/EEC on Unfair Terms in Consumer Contracts (the Directive).6

In early 2007 the OFT commenced an investigation into such charges.7 It quicklytranspired that a key issue related to whether or not Regulation 6(2) circumscribed any claimthat the charges were unfair for the purposes of the Regulations. Regulation 6(2) owes itsexistence to Article 4(2) of the Directive. Article 4(2) provides:

Assessment of the unfair nature of the terms shall relate neither to the definitionof the main subject matter of the contract nor to the adequacy of the price andremuneration, on the one hand, as against the services or goods supplies [sic] inexchange, on the other, in so far as these terms are in plain intelligible language.

* Director, Durham University Institute of Commercial and Corporate Law. I would like to thank Dr Mel Kenny, Claire Devenney, Richard Coleman, Dr Amandine Garde, Dr Warren Swain and KarenFairweather for their assistance. The usual caveats apply.

1 A useful summary of which can be found in the OFT’s joint reply and defence to the counterclaims (dated11 November 2007) in OFT v Abbey National plc [2008] EWHC 875 (Comm), which is available atwww.oft.gov.uk/shared_oft/personal-current-accounts/OFT’s-joint-reply-and-def.pdf.

2 See, for example, OFT, Personal Current Accounts in the UK (OFT 918, April 2007), p. 2, which was followed by,inter alia, OFT, Personal Current Accounts in the UK: A market study (OFT 1005, July 2008).

3 Ibid.4 Office of Fair Trading v Abbey National plc [2009] UKSC 6, para. 17, per Lord Walker.5 See, for example, the narrative in OFT v Abbey National plc [2008] EWHC 875 (Comm), para. 2, per Andrew

Smith J.6 (1993) OJ L95/29. In relation to the consequences of the Directive being one of minimum harmonisation, see

Caja de Ahorros y Monte de Piedad de Madrid v Asociación de Usuarios de Servicios Bancarios C-484/08, [2010] 3 CMLR 43.7 See, for example, www.oft.gov.uk/news-and-updates/press/2007/67-07.

Ultimately, the OFT issued proceedings, against (and with the agreement of) variousbanks and building societies (the banks), centring on the correct interpretation ofRegulation 6(2) and its contention that Regulation 6(2) did not circumscribe any claim thatthe relevant charges were unfair for the purposes of the Regulations.8 The issue was, for aperiod of time, considerably widened by the banks’ counterclaim to include, for example,issues relating to whether or not the common law rule against penalties was engaged; yet,ultimately, the case focused on the Regulations. At first instance,9 and in the Court ofAppeal,10 it was held (albeit for different reasons) that Regulation 6(2) did not prevent therelevant charges from being characterised as unfair under the Regulations.

Nevertheless a further appeal by the banks was subsequently allowed by the SupremeCourt,11 the immediate aftermath of which was that the OFT decided not to pursue itsinvestigation into such terms under the Regulations.12 This paper seeks to analyse thedecision of the Supreme Court in OFT v Abbey National plc, and its implications for theEuropeanisation of private law. More specifically this paper presents the decision of theSupreme Court in Abbey as another example of the uneven interpretation of theRegulations, and by implication the Directive, in the United Kingdom. Yet there is a widerissue in Abbey, viz. the potential impact of political compromises on EU harmonisationagendas; in particular it is argued that Article 4(2) is, essentially, an uneasy and somewhatopaque political compromise provision, the knot of which is only exacerbated by thebackdrop of the (almost) chameleonic rationalisations of EU legislation in the consumerarena. Indeed, even leaving aside the evolving nature of internal market considerations,13

the courts of the Member States are only provided with, at best, vague co-ordinates on howto interpret Article 4(2). In such circumstances, a robust and efficient reference process tothe European Court of Justice, to act as a compass, seems essential. Yet Abbey reveals a realreluctance on the part of the Supreme Court to refer this issue to the European Court ofJustice, and this paper also explores some of the possible reasons behind such a stance.

The Unfair Terms in Consumer Contracts Regulations 1999

At the outset, it will be helpful to briefly outline the Unfair Terms in Consumer ContractRegulations 1999. As noted above, these Regulations seek to transpose the (minimumharmonisation) EC Council Directive on Unfair Terms in Consumer Contracts.14 In general


8 OFT v Abbey National plc [2009] UKSC 6, para. 18, per Lord Walker.9 [2008] EWHC 875 (Comm).10 [2009] EWCA Civ 116.11 [2009] UKSC 6.12 See www.oft.gov.uk/news-and-updates/press/2009/144-09 where the following is stated: “After detailed

consideration of the judgment and of the various options available to it, the OFT has concluded that anyinvestigation it were to continue into the fairness of current unarranged overdraft charging terms under theUTCCRs [the Regulations] would have a very limited scope and low prospects of success. Given this, it hasdecided against taking forward such an investigation. The OFT nevertheless continues to have significantconcerns about the operation of the market for personal current accounts. Despite some recent and plannedimprovements by banks, particularly around transparency and customer switching, it believes fundamentalchanges are still required for the market to work in the best interests of bank customers. Banks earn arounda third of their personal current account revenues from unarranged overdraft charges that are difficult tounderstand, not transparent and not subject to effective consumer control.”

13 Cf. J H H Weiler, “The transformation of Europe” (1991) 100 Yale Law Journal 2043; L W Gormley,“Competition and free movement: is the internal market the same as the Common Market?” (2002) EBLRev 522.

14 93/13/EEC.

terms, these freestanding Regulations follow closely the wording of the Directive.15

Regulation 4 states that the Regulations deal with “unfair terms in contracts concludedbetween a seller or a supplier and a consumer”; and Regulation 8 states that an “unfair term”is not binding on the consumer. A seller/supplier is defined as “any natural or legal personwho . . . is acting for purposes relating to his trade, business or profession” whereas aconsumer is defined as “any natural person who . . . is acting for purposes which are outsidehis trade, business or profession”.16 Regulation 5(1) (which is supplemented by an indicativebut non-exhaustive list of the terms which might be regarded as unfair)17 states that:

A contractual term which has not been individually negotiated shall be regardedas unfair if, contrary to the requirement of good faith, it causes a significantimbalance in the parties’ rights and obligations arising under the contract, to thedetriment of the consumer.

The test of “unfairness” in Regulation 5 is circumscribed by other parts of theRegulations. In particular, Regulation 6(2) provides:

In so far as it is in plain intelligible language, the assessment of fairness of a termshall not relate—(a) to the definition of the main subject matter of the contract, or(b) to the adequacy of the price or remuneration, as against the goods or services

supplied in exchange.It was Regulation 6(2) which was at the centre of the bank charges litigation.

The bank charges litigation

The OFT is empowered to make collective challenges to unfair terms under the Regulations,as is envisaged by Article 7 of the Directive.18 Article 7 of the Directive provides:

Member States shall ensure that, in the interests of consumers and ofcompetitors, adequate and effective means exist to prevent the continued use ofunfair terms in contracts concluded with consumers by sellers or suppliers . . .The means . . . shall include provisions whereby persons or organizations, havinga legitimate interest under national law in protecting consumers, may take action. . . for a decision as to whether contractual terms drawn up for general use areunfair, so that they can apply appropriate and effective means to prevent thecontinued use of such terms.

As noted above, in 2007 the OFT issued proceedings, against (and with the agreementof) various banks and building societies, centring on the correct interpretation ofRegulation 6(2) and its contention that Regulation 6(2) did not circumscribe any claim thatthe relevant charges were unfair for the purposes of the Regulations.19 At first instance,Andrew Smith J held that the relevant terms were not protected by Regulation 6(2) frombeing characterised as unfair under the Regulations; in particular the learned judge, focusingon the wording of Regulation 6(2), felt that the charges were not paid in exchange for any

Gordian knots in Europeanised private law

15 The Explanatory Notes to the Regulations state: “These Regulations revoke and replace the Unfair Terms inConsumer Contracts Regulations 1994 (S.I. 1994/3159) which came into force on 1st July 1995. ThoseRegulations implemented Council Directive 93/13/EEC on unfair terms in consumer contracts (O.J. No. L95,21.4.93, p. 29). Regulations 3 to 9 of these Regulations re-enact regulations 2 to 7 of the 1994 Regulationswith modifications to reflect more closely the wording of the Directive.”

16 Regulation 3.17 Schedule 2.18 See also Enterprise Act 2002, Part 1.19 OFT v Abbey National plc [2009] UKSC 6, para. 18, per Lord Walker.

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services.20 Such a stance is particularly attractive in relation to so-called “unpaid itemcharges” where a bank refuses to honour an instruction (and thereby provide a “service”) onan account with insufficient funds for the instruction.21

The Court of Appeal22 dismissed the appeal23 although its reasoning did not entirelymatch the reasoning of the learned judge. Essentially, the Court of Appeal, taking its leadfrom Director General of Fair Trading v First National Bank plc,24 made a distinction between coreand ancillary terms, only the former of which come within Regulation 6(2);25 and held thatthe charges in question were ancillary terms and, hence, not covered by Regulation 6(2).26

Nevertheless a further appeal by the banks was subsequently allowed by the Supreme Court.

Regulation 6(2)

Before considering the judgment of the Supreme Court in OFT v Abbey National plc, it ishelpful to identify a number of issues which arise in relation to Regulation 6(2). The firstissue which arises in relation to Regulation 6(2) concerns the rationale behind Article 4(2)27

of the Directive (the Article which Regulation 6(2) seeks to transpose). One of thedifficulties here is that the language employed by Article 4(2) and Recital (19)28 of theDirective is not particularly helpful in this regard; indeed it is, perhaps, unsurprising that thisshould be so given that the legislative history of Article 4(2) reveals that it is essentially a,not entirely comfortable,29 compromise provision.30 Nevertheless, in general terms it seemsthat Article 4(2) owes its genesis to the distinction between core terms and ancillary termsfound in the German Standard Contracts Act 1976;31 the essential idea being that in ageneral sense there is only real consent to core terms.32


20 At paras 406–9 the learned judge stated: “In reality they are not charges in exchange for services involved inmaking payments, but charges levied because the services are supplied in particular circumstances. While theBanks’ evidence shows that additional processes are involved if the customer gives a payment instructionwhen he does not have funds or a facility to cover it, these are not explained in the documentation providedto customers and, even if the typical customer would suppose that this might be the case, the contract doesnot identify these additional processes as being provided in exchange for the charges . . . Undoubtedly, as theBanks point out, when a bank makes arrangements with a customer in advance for an overdraft facility, thecustomer might incur an arrangement fee for the facility as well as interest, but typically the fee for the facilityis charged regardless of whether it is used and the interest is charged for the borrowing itself. Clearly theRelevant Charges are not levied in exchange for a facility in that sense.”

21 See OFT v Abbey National plc [2008] EWHC 875 (Comm), para. 403, per Andrew Smith J.22 Sir Anthony Clarke MR, Lord Justice Waller V-P and Lloyd LJ.23 [2009] EWCA Civ 116.24 [2001] UKHL 52.25 [2009] EWCA Civ 116, para. 69.26 Ibid. para. 104.27 Cf. M Chen Wishart, “Transparency and fairness in bank charges” (2010) 126 Law Quarterly Review 157.28 Recital (19) states: “Whereas, for the purposes of this Directive, assessment of unfair character shall not be

made of terms which describe the main subject matter of the contract nor the quality/price ratio of the goodsor services supplied; whereas the main subject matter of the contract and the price/quality ratio maynevertheless be taken into account in assessing the fairness of other terms; whereas it follows, inter alia, thatin insurance contracts, the terms which clearly define or circumscribe the insured risk and the insurer’s liabilityshall not be subject to such assessment since these restrictions are taken into account in calculating thepremium paid by the consumer.”

29 Cf. also T Hartley, “Five forms of uncertainty in European Community law” (1996) Cambridge Law Journal 265.30 Cf. H-W Micklitz, The Politics of Judicial Co-Operation in the EU (Cambridge: CUP 2005), p. 360.31 See the excellent discussion in C Willett, Fairness in Consumer Contracts: The Case of Unfair Terms (Aldershot:

Ashgate 2007), pp. 245–53.32 A de Moor, “Common and civil law conceptions of contract and a European law of contract: the case of the

Directive on Unfair Terms in Consumer Contracts” (1995) 3 European Review of Private Law 257, p. 268.

36

The second issue relates to the effect of Regulation 6(2). More specifically, it isdebatable whether Regulation 6(2), where applicable, prohibits any claim that the term inquestion is “unfair” under the Regulations, or whether it only prohibits a claim that the termin question is “unfair” under the Regulations on the ground that it is, in effect, substantivelyunfair. The former construction might be classified as an “excluded term” approach,whereas the latter construction might be classified as an “excluded assessment” approach.33

Here again the language employed by Article 4(2) and Recital (19) of the Directive, andRegulation 6(2), is not particularly helpful: Recital (19) arguably tends to the “excludedterm” construction whereas Article 4(2) (and consequently Regulation 6(2)) arguably tendsto an “excluded assessment” construction. Presumably, however, if the rationale suggestedabove for Regulation 6(2) is correct, then an “excluded assessment” construction should beadopted on the basis there may not be true consent to terms which were, for example,procured, in effect, by procedural unconscionability.34

The third issue relates to the effect of the introductory words of Regulation 6(2) (“[i]nso far as it is in plain intelligible language”): does this mean that if a term which wouldnormally be covered by the exception in Regulation 6(2) is not “in plain intelligiblelanguage”, the exception (whatever its parameters) provided by Regulation 6(2) ceases to beapplicable? Again, presumably, if the rationale suggested above for Regulation 6(2) iscorrect, then it can be argued that the exception found in Regulation 6(2) does notnecessarily apply at all as there may not have been, or at least there is a risk that there willnot have been, true consent.35 Indeed, this is the result that the Supreme Court in Abbey36

tended towards when dealing with the problematic case of OFT v Foxtons.37

The fourth issue relates to the applicability of Regulation 6(2). In particular, if (as seemsto be the case)38 Regulation 6(2) focuses on particular terms, which terms relate to “the priceor remuneration”? In a sense, of course, all terms which confer a benefit on theseller/supplier, or impose a burden on the consumer, constitute part of “the price orremuneration”. Yet if such an interpretation were adopted in conjunction with an “excludedterm” approach, the Directive (and the Regulations) would be almost redundant; and ifsuch an interpretation were adopted in conjunction with an “excluded assessment”approach, the Directive (and the Regulations) would provide little, if any, relief against, so-called, substantive unfairness (which contrasts uncomfortably with some of the terms in theSchedule 2 grey-list).39 Thus, the important point for this paper is that there must be somemeans of distinguishing between those parts of “the price or remuneration” (in its widestsense) which attract the attention of Regulation 6(2) and those parts which do not.

The narrow issue before the Supreme Court

The Supreme Court in Abbey was at pains to stress40 that the appeal before it onlyconcerned a relatively narrow issue, viz. whether or not it would be possible, at some point,for the OFT to challenge, under the Regulations, the relevant charges on the ground thatthey were, or might be, excessive in comparison to the services supplied in return. Indeed,Lord Phillips came close to allowing the appeal partly on a technical point of pleading: His


33 See OFT v Abbey National plc [2009] UKSC 6, paras 60–1, per Lord Phillips.34 Willett, Fairness in Consumer Contracts, n. 31 above, pp. 245–53.35 Ibid. p. 246.36 See para. 37.37 [2009] EWHC 1681.38 E Peel, Treitel: The Law of Contract (London: Sweet & Maxwell 2007), p. 296.39 See, for example, Schedule 2, 1(l).40 See, for example, OFT v Abbey National plc [2009] UKSC 6, para. 3, per Lord Walker.

37

Lordship felt that the charges were not charges for individual services but were part of thebanks’ overall remuneration for the package of services provided to relevant customers(and, in Lord Phillips’ opinion, the OFT had not sought to question the banks’ overallcharges);41 and therefore any claim that the charges were excessive, in comparison to theindividual services which triggered those charges, was essentially misconceived.42

On this basis, the issue of whether or not the relevant charges were unfair for thepurposes of the Regulations was not directly at issue in the appeal. Nevertheless, as notedabove, the Supreme Court did seem to prefer the “excluded assessment” approach toRegulation 6(2)43 and it did, tantalisingly yet opaquely, suggest that – despite its finding thatRegulation 6(2) prevented the OFT from claiming that the relevant charges were excessivein comparison to the services supplied in return – a challenge under the Regulations wasstill possible.44 One might, therefore, take issue (notwithstanding any constraints in termsof pleadings) with the narrow approach of the Supreme Court on two grounds.

First, we were told that there were “many thousands”45 of cases against banks,concerning the issue of whether or not the charges in question were unfair, stayed in theCounty Courts pending a decision in Abbey. Yet the narrow (even technical) approach of theSupreme Court in Abbey, combined with the fact that it seemed to leave the door open tochallenging the relevant charges under the Regulations, does little for the effective casemanagement of such claims (often brought by litigants in person).46 As we shall see below,it is, therefore, ironic that the Supreme Court argued – as a reason not to make a referenceto the European Court of Justice – that there was a “public interest” in resolving the issuequickly given, for example, the number of stayed cases awaiting its decision.47

The second issue concerns the impact of the decision of the European Court of Justicein Océano Group Editorial SA v Murciano Quintero48 relating to the issue of whether a nationalcourt could unilaterally raise the issue of unfairness (in the sense provided for by theDirective). The European Court of Justice noted:

As to the question of whether a court seised of a dispute concerning a contractbetween a seller or supplier and a consumer may determine of its own motionwhether a term of the contract is unfair, it should be noted that the system ofprotection introduced by the Directive is based on the idea that the consumer isin a weak position vis-à-vis the seller or supplier, as regards both his bargainingpower and his level of knowledge. This leads to the consumer agreeing to termsdrawn up in advance by the seller or supplier without being able to influence thecontent of the terms . . . the protection provided for consumers by the Directive entails thenational court being able to determine of its own motion whether a term of a contract before itis unfair when making its preliminary assessment as to whether a claim should be allowed toproceed before the national courts.49


41 See OFT v Abbey National plc [2009] UKSC 6, para. 64 and, particularly, para. 91.42 See ibid. paras 62–3 and 89–91.43 See ibid. para. 52, per Lord Walker, paras 61 and 91, per Lord Phillips, and, most clearly, para. 95, per Lord

Mance.44 See ibid. para. 52, per Lord Walker.45 Ibid. para. 17, per Lord Walker.46 Ibid.47 See n. 169 below and text thereto.48 C-240/98 to C-244/98.49 Ibid. paras 25–9 (emphasis added).

38

Océano Group Editorial SA v Murciano Quintero, of course, concerned a jurisdiction clause;yet it is not limited to such clauses.50 The rationale for national courts being able, andindeed it now seems required,51 to unilaterally raise the issue of fairness was set out in thefollowing terms:

The aim of Article 6 of the Directive, which requires Member States to lay downthat unfair terms are not binding on the consumer, would not be achieved if theconsumer were himself obliged to raise the unfair nature of such terms. Indisputes where the amounts involved are often limited, the lawyers’ fees may behigher than the amount at stake, which may deter the consumer from contestingthe application of an unfair term . . . It follows that effective protection of theconsumer may be attained only if the national court acknowledges that it haspower to evaluate terms of this kind of its own motion . . . As the FrenchGovernment has pointed out, it is hardly conceivable that, in a system requiringthe implementation of specific group actions of a preventive nature intended toput a stop to unfair terms detrimental to consumers’ interests, a court hearing adispute on a specific contract containing an unfair term should not be able to setaside application of the relevant term solely because the consumer has not raisedthe fact that it is unfair. On the contrary, the court’s power to determine of itsown motion whether a term is unfair must be regarded as constituting a propermeans both of achieving the result sought by Article 6 of the Directive, namely,preventing an individual consumer from being bound by an unfair term, and ofcontributing to achieving the aim of Article 7, since if the court undertakes suchan examination, that may act as a deterrent and contribute to preventing unfairterms in contracts concluded between consumers and sellers or suppliers.52

In this spirit – and given the case management issue in the background – it is clearlyarguable that the Supreme Court should have addressed the question of unfairness ingreater detail.

Regulation 6(2) in the Supreme Court

APPROACH TO INTERPRETATION

The approach which national courts adopt when interpreting legislation which seeks totranspose an EU Directive will impact, of course, on the strength and depth of the EUharmonisation agenda.53 Accordingly, it is axiomatic that national courts, normally, mustadopt an “EU” approach to the interpretation of such implementing legislation: thus, forexample, national courts are required to safeguard the effectiveness of the Directive inquestion54 and are often required to give concepts used in directives “an autonomous and


50 Cf. Cofidis SA v Fredout Case C-473/2000.51 See S Whittaker, “Judicial interventionism and consumer contracts” (2001) 117 LQR 215, p. 217. More

recently, in Pannon GSM Zrt v Erzsébet Sustikné Györfi, C-243/08 the European Court of Justice stated (atpara. 35): “The reply, therefore, to the second question is that the national court is required to examine, of itsown motion, the unfairness of a contractual term where it has available to it the legal and factual elementsnecessary for that task. Where it considers such a term to be unfair, it must not apply it, except if theconsumer opposes that non-application. That duty is also incumbent on the national court when it isascertaining its own territorial jurisdiction.” (emphasis added).

52 C-240/98 to C-244/98, paras 26–8.53 Cf. A Colombi Ciacchi, “Non-legislative harmonisation of private law under the European constitution: the

case of unfair suretyships” (2005) 13 European Review of Private Law 297.54 Cf. Case 6/64 Flaminio v ENEL [1964] ECR 585.

39

uniform interpretation”.55 Yet, subject to these overriding obligations, as noted below56

directives may provide a unique opportunity to develop national law, and meet EUobligations, in a coherent manner (albeit that this opportunity is not always exploited).57

At times the courts of England and Wales have taken, what seems like, a quintessentiallyEU approach to interpreting the Regulations. For example, in R (on the application of Khatun)v Newham LBC,58 where the Court of Appeal essentially had to consider whether or not theRegulations were applicable to land transaction, Laws LJ concluded:

As for the bite of the various materials I have cited, I consider that the OFT hadthe better of the argument. First, Mr Underwood’s seemingly strong point on thelanguage – that “goods and services” does not include land – is effectivelydemolished by the impact of the other language texts. “Biens” and its cognatesin Italian, Spanish and Portuguese refer to immovables as readily as movables.This alone undercuts a good deal of what Mr Underwood had to say. But morethan this: I think, with respect to Mr Underwood, that other aspects of hissubmissions on this part of the case place an implicit but illegitimate reliance onthe large divide in the law of England between real and personal property. Hesubmitted that the Directive should be interpreted as only applying to “contractsfor goods and services as an English lawyer would understand those terms”.There is plainly no general principle to support such a proposition. Quite thecontrary: European legislation has to be read as a single corpus of law bindingacross the member states. And the proposition leads to absurdity. A licence ofland, which transfers no estate, might be covered by the Directive (as theprovision of a service), but a lease or tenancy would not. The sale of a fixture,which by English law is treated as part of the land, would be excluded, but thesale of an identical object – say a statue – which was not fixed to the land wouldbe included. In our domestic law these distinctions have a long history and apresent utility. In the context of a Europe-wide scheme of consumer protection,they could be nothing but an embarrassing eccentricity.59

Yet, overall, the approach to the interpretation of the Regulations (and, therefore, theDirective) by the Courts in England and Wales is a little uneven.60 This point can beillustrated by reference to the case law in England and Wales on the vexed question ofwhether or not the Regulations apply to non-professional surety transactions.61 From aliteral point of view, a difficulty with applying the Regulations to such transactions is that


55 See, for example, Case C-287/98 Luxembourg v Linster [2000] ECR I-6917, para. 43.56 See text after n. 192 below.57 Cf. G Teubner, “Legal irritants: good faith in British law or how unifying law ends up in new divergences”

(1998) 61 Modern Law Review 11.58 [2004] EWCA Civ 55.59 Ibid. para. 78.60 See also, for example, the European Commission’s Report on Directive 93/13/EEC on Unfair Terms in Consumer

Contracts (Com (2000) 248 final), at p. 32, rather optimistically noted that: “An analysis of CLAB [Europeandatabase on unfair terms in consumer contracts] shows that already 4.4% of the judgments handed down bynational courts in the field covered by the Directive refer to the Community text. At the current stage ofEuropean construction this is a figure to be proud of and reflects the progressive impact of Community lawon the national legal orders.” At p. 34 it is noted that: “National courts could have referred many cases to theCourt of Justice for a preliminary ruling and it would have been very useful if the judgments of Court ofJustice had been able to cast light on the scope of some of the Directive’s more obscure provisions. Indeedthe doctrine reveals the reluctance of the national courts to refer cases to the Court of Justice in this legalfield.”

61 See G McCormack, “Protection of surety guarantors in England – prophylactics and procedure” in A Colombi Ciacchi (ed.), Protection of Non-Professional Sureties in Europe: Formal and Substantive Disparity(Germany: Nomos 2007), pp. 172–3.

(assuming that the non-professional surety can be classified as a “consumer” for thepurposes of the Regulations) it is the non-professional surety who supplies the service; whereasthe creditor, as beneficiary of the agreement, will usually be acting in the course ofbusiness.62 Therefore, this question is part of the much wider debate as to whether or not,for the purposes of the Regulations, the consumer must be the recipient of goods or services.63

Support for the view that the Regulations do apply to surety transactions can be foundin the Opinion of the European Court of Justice in Bayerische Hypothetken v Dietzinger.64 Inthat case the European Court of Justice had to consider the applicability of CouncilDirective 85/577/EEC (on contracts negotiated away from business premises) – whichapplies to particular situations where “a trader supplies goods or services to a consumer”65

– to surety transactions. In a judgment, which is not without controversy,66 the EuropeanCourt of Justice stated that:

. . . it is apparent from the wording of Article 1 of Directive 85/577 and fromthe ancillary nature of guarantees that the directive covers only a guaranteeancillary to a contract whereby, in the context of “doorstep selling”, a consumerassumes obligations towards the trader with a view to obtaining goods or servicesfrom him. Furthermore, since the directive is designed to protect onlyconsumers, a guarantee comes within the scope of the directive only where, inaccordance with the first indent of Article 2, the guarantor has entered into acommitment for a purpose which can be regarded as unconnected with his tradeor profession.67

In reaching this conclusion – which gives a glimpse of how the European Court ofJustice might approach this issue in the context of the Directive68 – the European Court ofJustice noted that nothing in the directive required “the person concluding the contractunder which goods or services are to be supplied be the person to whom they aresupplied”69 and that surety agreements are merely ancillary to the main contract.70

Returning to the jurisprudence in England and Wales, in Barclays Bank plc v Kufner,71

Field J – relying heavily on the Opinion of the European Court of Justice in BayerischeHypothetken v Dietzinger72 – held that surety transactions are not excluded from the scope ofthe Regulations.73 By contrast in Bank of Scotland v Singh,74 Judge Kershaw QC, apparently

Gordian knots in Europeanised private law 41

62 See also J O’Donovan and J Phillips, The Modern Contract of Guarantee (London: Sweet & Maxwell 2003), p. 223.63 Cf. H G Beale (ed.), Chitty on Contracts 30th edn (London: Sweet & Maxwell 2008), para. 15-032.64 Case C-45/96 [1998] ECR I-1199.65 Article 1.66 See M Kenny, “Standing Surety in Europe: Common Core or Tower of Babel” (2007) Modern Law Review 175,

p. 180.67 Case C-45/96 [1998] ECR I-1199, para. 20. Although cf. Berliner Kindl Brauerei AG v Andreas Siepert [2000]

ECR 1-1741, paras 25–6 where the European Court of Justice, in considering Council Directive 87/102/EECfor the approximation of the laws, regulations and administrative provisions of the member states concerningconsumer credit, noted: “…the scope of the Directive cannot be widened to cover contracts of guaranteesolely on the ground that such agreements are ancillary to the principal agreement whose performance theyunderwrite, since there is no support for such an interpretation in the wording of the Directive … or in itsscheme and aims”.

68 See. Beale (ed.), Chitty on Contracts, n. 63 above, paras 44–139.69 Case C-45/96 [1998] ECR I-1199, para. 19.70 Ibid. para. 18.71 [2008] EWHC 2319 (Comm).72 Case C-45/96 [1998] ECR I-1199.73 [2008] EWHC 2319 (Comm), para. 28.74 QBD, unreported, 17 June 2005.

operating closer to the actual wording of the Regulations, held that the Regulations did notapply to surety transactions and his view has subsequently been described as “compelling”75

and “convincing”.76

This unevenness of approach is also evidenced by the Judgment of the Supreme Courtin OFT v Abbey National plc. Although the Supreme Court, unsurprisingly, accepted that apurposive approach to interpretation should be adopted in relation to the Regulations,77 theextent to which it successfully did so is debatable. For example, Lord Walker (with whomLord Phillips, Lady Hale and Lord Neuberger expressed agreement), whilst (entirelyappropriately) referring to both the Regulations and the text of the Directive, seems to haveadopted a largely literal interpretation of the relevant provisions. Thus, His Lordship stated:

When one turns to the other part of the quid pro quo of a consumer contract,the price or remuneration, the difficulty of deciding which prices are essential isjust the same, and Regulation 6(2)(b) contains no indication that only an“essential” price or remuneration is relevant. Any monetary price orremuneration payable under the contract would naturally fall within the languageof paragraph (b) (I discount the absence of a reference to part of the price orremuneration for reasons already mentioned).78

It is, of course, true that Lord Walker later noted that he believed his conclusions werein line with the travaux préparatoires.79 In so doing, Lord Walker made a distinction betweenconsumer protection and consumer choice; and referred, with apparent approval,80 to anarticle by Professor Hugh Collins81 which stated:

The Directive does not require consumer contracts to be substantively fair, butit does require them to be clear. Clarity is essential for effective marketcompetition between terms. What matters primarily for EC contract law isconsumer choice, not consumer rights.82

Yet, with respect (and ignoring Lord Walker’s apparent, possibly uneasy, conflation of“consumer choice” and “clarity”), such a view does not seem to do full justice to thedifferent facets of the Directive (and consequently the Regulations). More specifically, thereach of the Directive and the Regulations is not limited to terms which are not in plainintelligible language;83 nor is it possible to say that substantive unfairness is not relevantunder the Directive or the Regulations (although the extent to which it is relevant might be,of course, intensely debated84).85 The backdrop to this discussion is, of course, the much-debated86 issue of the purpose, and, indeed, the extent of the competence, of EUlegislation in the consumer arena. Over the years various bases for EU legislation in this area


75 Manches LLP v Carl Freer [2006] EWHC 991, para. 25, per Judge Philip Price QC.76 Williamson v Governor of the Bank of Scotland [2006] EWHC 1289, para. 46, per George Bompas QC, sitting as

a deputy judge.77 OFT v Abbey National plc [2009] UKSC 6, see, for example, para. 38, per Lord Walker.78 Ibid. para. 41.79 Ibid. para. 44.80 Ibid.81 H Collins, “Good faith in European contract law” (1994) 14 OJLS 229.82 Ibid. p. 238.83 See Regulation 5.84 Nor is the interplay between substantive and procedural unconscionability under the Regulations not

unproblematic following Director General of Fair Trading v First National Bank plc [2001] UKHL 52 above.85 See, for example, Unfair Terms in Consumer Contracts Regulations 1999, Sch. 2.86 Cf. M Kenny “The 2004 Communication on European Contract Law: those magnificent men in their unifying

machines” (2005) 30 European Law Review 724.

have been advanced, such as establishing an internal market or preventing the distortion ofcompetition.87 Yet none of those bases proved entirely unproblematic88 and, more recently,the desire to promote consumer confidence in the internal market has begun to emerge asa key base of EU intervention in the area of consumer law.89 This is, for example,evidenced by the prominent appeal to “consumer confidence” notions in the recentproposed Consumer Rights Directive:90

These disparities create significant internal market barriers affecting business andconsumers. They increase compliance costs to business wishing to engage incross border sale of goods or provision of services. Fragmentation alsoundermines consumer confidence in the internal market. The negative effect onconsumer confidence is strengthened by an uneven level of consumer protectionacross the Community. This problem is particularly acute in the light of newmarket developments.91

The key point for present purposes is that it must, at least, be arguable that “consumerconfidence” (even when counter-balanced by business interests) is not fostered solelythrough making sure contractual terms are in “plain intelligible language”.92

Lord Mance’s judgment (with which Lady Hale and Lord Neuberger expressedagreement) traces the gestation of the Directive;93 and Lord Mance places heavy reliance94

on an influential article by Professors Brandner and Ulmer95 to conclude:96

In my opinion, the identification of the price or remuneration for the purposesof . . . regulation 6(2) is a matter of objective interpretation for the court. Thecourt should no doubt read and interpret the contract in the usual manner, thatis having regard to the view which the hypothetical reasonable person would takeof its nature and terms. But there is no basis for requiring it to do so byattempting to identify a “typical consumer” or by confining the focus to matterson which it might conjecture that he or she would be likely to focus. Theconsumer’s protection under the Directive and Regulations is the requirement oftransparency on which both insist. That being present, the consumer is to beassumed to be capable of reading the relevant terms and identifying whatever isobjectively the price and remuneration under the contract . . .


87 C Twigg-Flesner, The Europeanisation of Contract Law (London: Routledge-Cavendish 2008), pp. 25ff.88 Ibid.89 Cf. T Wilhelmsson, “The abuse of the ‘confident consumer’ as a justification for EC consumer law” (2004)

27 Journal of Consumer Policy 317.90 See, generally, G Howells and R Schulze, Modernising and Harmonising Consumer Contract Law: With Reference to the

Planned Horizontal Consumer Contract Directive (Munich: Sellier 2009). The original proposed Directive is availableat: http://ec.europa.eu/consumers/rights/docs/COMM_PDF_COM_2008_0614_F_EN_PROPOSITION_DE_DIRECTIVE.pdf.

91 Recital (7) of the original proposal. See also EU Consumer Policy Strategy 2007–2013: Empowering consumers,enhancing their welfare, effectively protecting them, COM (2007) 99 Final.

92 Cf., for example, Recital (13) and Recital (16) of Directive 2005/29/EC concerning unfair business-to-consumer commercial practices in the internal market.

93 OFT v Abbey National plc [2009] UKSC 6, paras 109–112.94 Ibid. para. 109.95 H E Brandner and P Ulmer, “The Community Directive on Unfair Terms in Consumer Contracts: some

critical remarks on the proposal submitted by the EC Commission” (1991) 28 CMLR 647.96 OFT v Abbey National plc [2009] UKSC 6, para. 113.

Yet Lord Mance does not really unpack the coordinates within which this hypothetical,and reasonable, person is to operate;97 how is this person to filter price from non-priceterms? Moreover, in so far as Lord Mance’s conclusions are based on the view that theprotection afforded to consumers under the Directive and the Regulations is one oftransparency, it is, with respect (and not necessarily meaning to suggest that “transparency”and “clarity” are coterminous), open to some of the same criticisms as Lord Walker’sconclusion on this point. In particular, it is not possible to state that the unfairness testunder the Directive and the Regulations is limited to questions of transparency.98 Moreover,again, it must, at least, be arguable that “consumer confidence” objectives (even whencounter-balanced by business interests) are not fostered solely through making surecontractual terms are “transparent”.99

Notwithstanding the foregoing criticisms, it must be acknowledged that the task ofinterpreting, in an appropriate fashion, Regulation 6(2) is not a straightforward task. Inparticular, the Supreme Court was faced with an ambiguous “compromise” provision in adirective; the purpose(s) of the Directive was debatable; the European Court of Justice hadessentially not considered the relevant provision; and the provision has been transposed indifferent ways throughout the EU.100 In such circumstances, a robust and efficientreference process to the European Court of Justice, to act as a compass, might have beenhelpful; yet, it seems that the reference process is not always perceived to have suchqualities101 (even if the Supreme Court had been inclined to make a reference to theEuropean Court of Justice).102

THE RESULTANT INTERPRETATION OF REGULATION 6(2)(b) BY THE SUPREME COURT

As noted above, the Supreme Court was unanimous in finding that the charges in questionwere covered by Regulation 6(2)(b); thus precluding, at least, any challenge to the termsbased merely on the assertion that these charges were excessive.103 Nevertheless, it ispossible to identify some differences of construction of Regulation 6(2)(b) within theSupreme Court. For example, Lord Walker, in effect, construed Regulation 6(2)(b) asreferring to some forms of monetary consideration payable under the relevant contract.104

Such a construction is noteworthy for, at least, two reasons. First, even when heeding LordSteyn’s note of caution in Director General of Fair Trading v First National Bank plc,105 it impliesthat it is possible to review some central non-monetary payment terms for substantive fairness.Thus, for example, if a consumer part-exchanges their old home for a new home, on LordWalker’s view of Regulation 6(2)(b) it would seem that standard terms relating to how the“credit” for the old home is to be determined might be subject to review, under theRegulations, for substantive fairness. Yet if, as Lord Walker believes,106 the Regulations are


97 Compare, in general terms, A Chandler and J Devenney, “Mistake as to identity and the threads of objectivity”(2004) Journal of Obligations and Remedies 7.

98 See, for example, Sch. 2, 1(l).99 Again compare, for example, Recital (13) and Recital (16) of Directive 2005/29/EC concerning unfair

business-to-consumer commercial practices in the internal market.100 H Schulte-Nölke, EC Consumer Law Compendium: Comparative Analysis (2008), p. 345, available at:

http://ec.europa.eu/consumers/rights/docs/consumer_law_compendium_comparative_analysis_en_final.pdf.101 Cf. C Turner and R Munoz, “Revisiting the judicial architecture of the European Union” (1999/2000) 19

YBEL 1.102 On which see the text to n. 169 below.103 See, for example, OFT v Abbey National plc [2009] UKSC 6, para. 51, per Lord Walker.104 Ibid. para. 43.105 [2001] UKHL 52, para. 34.106 OFT v Abbey National plc [2009] UKSC 6, para. 44.

concerned with providing consumers with clarity rather than protection per se, it is difficultto maintain his distinction between monetary and non-monetary standard terms.

The second aspect of Lord Walker’s construction of Regulation 6(2)(b) which isnoteworthy is his view that only some forms of monetary consideration payable under therelevant contract are covered by that provision. Of course, even if Lord Walker had beenconsidering this provision afresh, it would have been difficult for him not to have made thisconcession given some of the clauses listed in Schedule 2 as indicative of unfair terms.107

Yet Regulation 6(2)(b) had already, in effect,108 been considered by, inter alia, the House ofLords in Director General of Fair Trading v First National Bank plc.109 The key issue in that casefor present purposes was whether the predecessor to Regulation 6(2)(b) covered a term ina credit agreement which provided that interest, at the contractual rate, was to continue toaccrue “after as well as before any judgment (such obligation to be independent of and notto merge with the judgment)”. The House of Lords unanimously held that this term didnot come within the predecessor of Regulation 6(2)(b). In so doing, Lord Steyn noted:

Clause 8 of the contract, the only provision in dispute, is a default provision. Itprescribes remedies which only become available to the lender upon the defaultof the consumer. For this reason the escape route of regulation 3(2) is notavailable to the bank. So far as the description of terms covered by regulation3(2) as core terms is helpful at all, I would say that clause 8 of the contract is asubsidiary term. In any event, regulation 3(2) must be given a restrictiveinterpretation. Unless that is done regulation 3(2)(a) will enable the main purposeof the scheme to be frustrated by endless formalistic arguments as to whether aprovision is a definitional or an exclusionary provision. Similarly, regulation3(2)(b) dealing with “the adequacy of the price or remuneration” must be givena restrictive interpretation. After all, in a broad sense all terms of the contract arein some way related to the price or remuneration. That is not what is intended. . . It would be a gaping hole in the system if such clauses were not subject to thefairness requirement. For these further reasons I would reject the argument ofthe bank that regulation 3(2), and in particular 3(2)(b), take clause 8 outside thescope of the Regulations.110

In Abbey, Lord Walker used this passage to qualify his view that Regulation 6(2)(b) coversmonetary consideration payable under the relevant contract; Lord Walker was apparently ofthe view that default provisions were not captured by Regulation 6(2)(b). Leaving aside theconundrum of why, for example, excessive default terms are covered by the Regulationswhereas excessive non-default terms are not (and the fact that Director General of Fair Tradingv First National Bank plc seemed to involve a primary obligation which was extended into thedefault zone by clause 8), this construction is intriguing. In particular, it is not difficult toconceive of situations where an enterprise with many customers relies on the statisticalprobability of default by individual customers (and the associated default charges) as part ofits profitability calculations and forecasts.111 Indeed, it may be that bank charges were at onetime regarded as default clauses; whereas today, certainly in the aftermath of Abbey, they canbe regarded as non-default clauses given, for example, the reliance which banks place uponthem (and possibly different attitudes towards credit and debt).112 Thus, Lord Phillips noted:


107 See, for example, Sch. 2, 1(e).108 Under the then Unfair Terms in Consumer Contracts Regulations 1994 (1994/3159).109 [2001] UKHL 52.110 Ibid. para. 34.111 Cf. in broad terms UK Housing Alliance (North West) Ltd v Francis [2010] EWCA Civ 117.112 On which see, generally, C Scott and J Black, Cranston’s Consumers and the Law (London: Butterworths 2000),

pp. 229–32.

When the relevant facts are viewed as a whole, it seems clear that the RelevantCharges are not concealed default charges designed to discourage customersfrom overdrawing on their accounts without prior arrangement. Whatever mayhave been the position in the past, the Banks now rely on the Relevant Chargesas an important part of the revenue that they generate from the current accountservices. If they did not receive the Relevant Charges they would not be ableprofitably to provide current account services to their customers in creditwithout making a charge to augment the value of the use of their funds.113

Returning to Lord Walker’s judgment, it is also clear that His Lordship did not qualifyhis construction of Regulation 6(2)(b) solely by reference to default terms. Indeed, such aview would have been clearly unsustainable given that some of the terms listed inSchedule 2 (as indicative unfair terms) are monetary obligations which are not necessarilydefault terms.114 Again if, as Lord Walker believes,115 the Regulations are concerned withproviding consumers with clarity rather than protection per se, it is difficult to maintain hisdistinction between different types of monetary standard terms.

Lord Walker provides little guidance on which monetary obligations come withinRegulation 6(2)(b) and which monetary obligations do not do so; indeed, somewhatironically after agreeing with a description of the Court of Appeal’s approach as “over-elaborate”,116 Lord Walker reverts to language (admittedly with a “health-warning”)117 suchas “ancillary” and “non-core”.118 One might argue that this uncertainty may undermine“consumer confidence”; yet, it must be debatable the extent to which, if at all, the minutiaeof consumer protection in a particular Member State (as opposed to the broad lines ofconsumer protection in any given Member State) actually affects “consumerconfidence”.119 On the other hand, such uncertainty might impact on business patterns,120

and may also inefficiently expend some of the finite resources that bodies such as the OFThave for work in this area.

In broad agreement with Lord Walker, Lord Mance was of the opinion that not all ofthe payment provisions under a relevant contract are necessarily covered by Regulation6(2)(b);121 and he, like Lord Walker, gave default provisions as an example of paymentprovisions which, seemingly, are not captured by Regulation 6(2)(b).122 As such, this aspectof Lord Mance’s position attracts some of the same criticisms as Lord Walker’s position.Yet, as noted above, Lord Mance’s ultimate conclusion on Regulation 6(2)(b) has a ratherdifferent flavour to Lord Walker’s conclusions; in particular, Lord Mance regards thedetermination of the “price or remuneration” as the province of the (coordinates lacking)“hypothetical reasonable person”. The difficulty with such an approach, of course, is that– as is vividly illustrated by this litigation – the viewpoint of the banks and the viewpointof their consumers on this issue is likely to be markedly different; and there may be littleground for the “hypothetical reasonable person” to steer a middle course. Ultimately,


113 OFT v Abbey National plc [2009] UKSC 6, para. 88.114 See, for example, Sch. 2, 1(d).115 OFT v Abbey National plc [2009] UKSC 6, para. 44.116 Ibid. para. 38.117 Ibid. para. 46.118 Ibid.119 Cf. R Goode, “Contract and commercial law: the logic and limits of harmonisation” in F W Grosheide and

E Hondius, International Contract Law (Antwerp: Intersentia 2004).120 See, for example, Recital (8) of the proposed Consumer Rights Directive.121 OFT v Abbey National plc [2009] UKSC 6, para. 113.122 Ibid.

therefore, Lord Mance’s construction of Regulation 6(2)(b) may also result in uncertaintywhich impacts on business patterns,123 and possibly inefficiently expends some of the finiteresources that bodies such as the OFT have for work in this area.

THE INTERPRETATION OF REGULATION 6(2)(a) BY THE SUPREME COURT

Although the attention of the Supreme Court in Abbey was focused on Regulation 6(2)(b),the Supreme Court did make some interesting comments on the proper interpretation ofRegulation 6(2)(a). As readers will, no doubt, remember, Regulation 6(2) provides “[i]n sofar as it is in plain intelligible language, the assessment of fairness of a term shall not relate. . . (a) to the definition of the main subject matter of the contract”; and some indicationof the intended operation of Regulation 6(2)(a) can be found in Recital (19):

Whereas, for the purposes of this Directive, assessment of unfair character shallnot be made of terms which describe the main subject matter of the contract northe quality/price ratio of the goods or services supplied; whereas the mainsubject matter of the contract and the price/quality ratio may nevertheless betaken into account in assessing the fairness of other terms; whereas it follows,inter alia, that in insurance contracts, the terms which clearly define orcircumscribe the insured risk and the insurer’s liability shall not be subject to suchassessment since these restrictions are taken into account in calculating thepremium paid by the consumer.

One of the immediate difficulties that arises in relation to Regulation 6(2)(a) is that thereis, prima facie, an argument that it renders exclusion clauses immune for review under theRegulations. More specifically, there is an argument that exclusion clauses define theobligations, and risks, of the parties (rather than merely exclude liability)124 and, if so, itfollows from Recital (19) that they are caught by Regulation 6(2)(a). Yet, whatever the truenature of exclusion clauses, it is clear that exclusion clauses are often regarded as primecandidates for the label of “unfair terms” under the Regulations.125

Nevertheless difficulties do still persist. Recital (19) makes it clear that “terms whichclearly define or circumscribe the insured risk and the insurer’s liability” are captured byRegulation 6(2)(a); and it also seems beyond argument that exclusion clauses are not caughtby Regulation 6(2)(a); but what about other types of exclusion? For example, in suretytransactions the surety has the right to be discharged on the occurrence of certain events;thus the creditor has a well-established equitable duty not to release any security which itholds in relation to the principal debt.126 As a result it is commonplace127 for creditors toinsert clauses into surety transactions which exclude a surety’s right to be discharged on thehappening of such events.128 The key point to note about such clauses is that they aim topreserve the surety’s liability rather than to exclude the creditor’s liability.129 Nevertheless, itis difficult to predict whether or not such clauses would fall within Regulation 6(2)(a).130

123 Again see, for example, Recital (8) of the proposed Consumer Rights Directive.124 See, for example, the speech of Lord Diplock in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827.

Cf. D Yates, Exclusion Clauses in Contracts 2nd edn (London: Sweet & Maxwell 1992), pp. 123–33.125 See, generally, J Beatson, A Burrows and J Cartwright, Anson’s Law of Contract (Oxford: OUP 2010), p. 207.126 See, for example, Skipton Building Society Ltd v Stott [2001] QB 261.127 See Barclays Bank plc v Kufner [2008] EWHC 2319 (Comm), para. 16.128 See further J Devenney, “Aspects of property, security and guarantees” in M Furmston and J Chuah,

Commercial and Consumer Law (London: Pearson 2010), p. 42.129 See McCormack, “Protection of surety guarantors”, n. 61 above, p. 171.130 The point does not seem to have been raised in the relevant case law.


In Abbey, Lord Walker read Regulation 6(2)(a) and Regulation 6(2)(b) as representing theessential quid pro quo131 present in the relevant consumer contracts although he stoppedshort of stating that Regulation 6(2) should be read either conjunctively or disjunctively.132

Moreover, Lord Walker (seemingly in contradistinction to Lord Mance)133 interpreted thephrase “main subject matter” of the contract in a rather generic fashion:

The main subject-matter may be goods or services. If it is goods, it may be asingle item (a car or a dishwasher) or a multiplicity of items. If for instance aconsumer orders a variety of goods from a mail-order catalogue . . . there is nopossible basis on which the court can decide that some items are more essentialto the contract than others. The main subject matter is simply consumer goodsordered from a catalogue . . . Similarly, a supply of services may be simple (anentertainer booked to perform for an hour at a children’s party) or composite (aweek’s stay at a five-star hotel offering a wide variety of services). Again, there isno principled basis on which the court could decide that some services are moreessential to the contract than others and again the main subject matter must bedescribed in general terms—hotel services.134

A number of points may be made in relation to this statement. The first point to makeis that, initially at least, it seems that Lord Walker’s “generic” approach to Regulation 6(2)(a)– with its high level of abstraction – is simple to apply. Yet, on reflection, it is not clear thatthis is necessarily so. Again we may use the thorny question of whether or not theRegulations apply to non-professional surety transactions as an example.135 As is wellknown, doctrinally (and in general terms) a surety assumes secondary and accessoryliability.136 In other words, the surety’s obligations are generally dependent on the existenceof a primary obligation between the creditor and primary debtor,137 and on the default ofthe primary debtor.138 As is also well known, under the general law there are also variouswell-established situations where a surety’s obligations will be discharged (we have alreadyreferred to the creditor’s well-established equitable duty not to release any security which itholds in relation to the principal debt139).140 Nevertheless, as we have seen,141 creditorsoften seek to “exclude” the surety being discharged in such circumstances. However, suchclauses – and indeed “principal debtor” clauses142 – do not necessarily lead to theconclusion that the contract is not a contract of suretyship.143 Yet, on Lord Walker’s genericapproach to Regulation 6(2)(a), how would the main subject matter of such contracts be


131 Although cf. His Lordship’s statement (OFT v Abbey National plc [2009] UKSC 6, para. 46): “. . . delivery ofgoods or peripheral extras may be disregarded as ancillary for the purposes of para (a) of Regulation 6(2), butthe charges for them, if payable under the same contract, are part of the price for the purposes of para (b).”

132 Ibid. para. 31.133 Ibid. para. 103, Lord Mance noted: “. . . since the deposit with or transfer to a bank of money is the main or

part of the main subject matter of a banking contract, any assessment of the fairness of it or its legalconsequences would appear to be excluded under regulation 6(2)(a), rather than (b)”.

134 Ibid; paras 39–40.135 See McCormack, “Protection of surety guarantors”, n. 61 above, pp. 172–3.136 See further Devenney, “Aspects of property”, n. 128 above, p. 24.137 See L S Sealy and R J A Hooley, Commercial Law 4th ed (Oxford: OUP 2008), p. 1150.138 See Moschi v Lep Air Services Ltd [1973] AC 331.139 See, for example, Skipton Building Society Ltd v Stott [2001] QB 261.140 See further Devenney, “Aspects of property”, n. 128 above, pp. 46–8.141 See Barclays Bank plc v Kufner [2008] EWHC 2319 (Comm), para. 16.142 See, for example, Heald v O’Connor [1971] 1 WLR 497 and General Produce Co v United Bank Ltd [1979] 2 Lloyd’s

Rep 255.143 See further Devenney, “Aspects of property”, n. 128 above, p. 27.

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framed? More specifically would the main subject matter of such contracts be the provisionof surety stricto sensu, or (at a higher level of abstraction) merely the provision of security?If the former approach is to be preferred over the latter approach then (subject to whatfollows) it is, perhaps, more likely that the Regulations do apply to non-professional suretytransactions; and this question is not just one of academic indulgence. Such transactionsperform an important economic role144 and the application of the Regulations to suchtransactions may significantly alter the balance of interests between the surety and thecreditor,145 possibly resulting in suretyship transactions becoming less attractive to banks146

and thus causing a narrowing in access to credit.147

The second point to make (in respect of Lord Walker’s “generic” approach toRegulation 6(2)(a)) is that it is clear – from the epithet “main” – that not all terms whichdescribe the subject matter of the contract come within Regulation 6(2)(a). A question,therefore, arises as to how, in this context, the main subject matter of a contract isdistinguished from the remainder of the subject matter of the contract; and this is a questionupon which Lord Walker’s judgment is less than helpful. Indeed, Lord Walker, again, refersto those terms not captured by Regulation 6(2) as “ancillary” terms,148 and, as such, issubject to some of the same criticisms outlined above in relation to Regulation 6(2)(a).149

The third point relates to the issue of whether or not Lord Walker’s rather “generic”approach to part of Regulation 6(2)(a) should prevail throughout that (sub-) provision.More specifically, which terms form part of “the definition of the main subject”150 for thepurpose of Regulation 6(2)(a)? Readers will no doubt be familiar with the somewhat


144 For example, in Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 44, paras 34–35, Lord Nicholls stated:“The problem . . . raised by the present appeals is of comparatively recent origin. It arises out of thesubstantial growth in home ownership over the last 30 or 40 years . . . More than two-thirds of householdersin the United Kingdom now own their own homes. For most home-owning couples, their homes are theirmost valuable asset. They must surely be free, if they so wish, to use this asset as a means of raising money,whether for the purpose of the husband’s business or for any other purpose . . . Bank finance is in fact by farthe most important source of external capital for small businesses with fewer than ten employees. Thesebusinesses comprise about 95 percent of all businesses in the country, responsible for nearly one-third of allemployment . . . If the freedom of home-owners to make economic use of their homes is not to be frustrated,a bank must be able to have confidence that a wife’s signature of the necessary guarantee and charge will beas binding upon her as is the signature of anyone else on documents which he or she may sign. Otherwisebanks will not be willing to lend money on the security of a jointly owned house or flat.” See, generally,J Devenney and M Kenny, “Unfair terms, surety transactions and European harmonisation: a crucible ofEuropeanised private law?” (2009) Conveyancer and Property Lawyer 295.

145 G Andrews and R Millett, The Law of Guarantees 4th edn (London: Thompson 2005), argue (at p. 85) that: “Ifthe regulations are applied to bank guarantees, it will be seen that there is considerable scope for aninterventionist judiciary to redress the balance between creditor and surety significantly.” Of course, theorthodox view is that before the Regulations the Law of England and Wales was unconcerned with thesubstantive fairness of surety transactions. Yet this is, perhaps, to overstate the case. As I have arguedelsewhere, the doctrine of undue influence is the mainstay of the protection afforded to sureties: seeJ Devenney, L Fox-O’Mahony and M Kenny, “Standing surety in England and Wales: the Sphinx ofprocedural protection” (2008) Lloyds Maritime and Commercial Law Quarterly 527. In cases of undue influence,it is sometimes tempting to view the former manifest disadvantage requirement solely in evidential terms.Nevertheless, if undue influence is based on a notion of unconscionability (on which see J Devenney andA Chandler, “Unconscionability and the taxonomy of undue influence” (2007) Journal of Business Law 541) therelevance of the substantive fairness of the transaction will not merely be evidential: see, for example, DunbarBank plc v Nadeem [1998] 3 All ER 876.

146 See M Kenny, “Standing Surety”, n. 66 above, pp. 195–6.147 See, generally, J Devenney and M Kenny, “Unfair terms”, n. 144 above.148 OFT v Abbey National plc [2009] UKSC 6, para. 46.149 See J Devenney and M Kenny, “Unfair terms”, n. 144 above.150 Emphasis added.

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“generic” (and, indeed, controversial)151 approach adopted by the House of Lords inAshington Piggeries Ltd v Christopher Hill Ltd152 to the question of which descriptive wordsform part of the description of goods for the purposes of s. 13 of the Sale of Goods Act1979. If a similar approach were adopted in this context, the scope of the exception inRegulation 6(2)(a) would be much curtailed and, potentially, consumer protection (and,possibly, consumer confidence) would be increased; for example, if a consumer purchasesa painting believing it to be by a famous painter (and pays a price which reflects this fact),a term in the contract which, in effect (and assuming it is not an exclusion clause), statesthat the seller does not warrant that the painting is by the famous painter in question mightnot be caught by the exception in Regulation 6(2)(a) if an Ashington Piggeries-like approachis adopted.

Overall our analysis of Regulation 6(2)(a), in the light of the comments of the SupremeCourt in Abbey on that provision, serves to highlight the uneasy compromise made inArticle 4(2) of the Directive against the backdrop of a not entirely coherent legislative basis.Moreover, our discussion also underlines the fact that a (largely) passively reproductive153

approach to transposing EU legislation places the onus of untangling any knots, andmaintaining some coherence in domestic law, firmly on the doorstep of the judiciary.

ECJ reference?

As noted above, the Supreme Court in Abbey was faced with an ambiguous “compromise”provision in a directive; the purpose(s) of the Directive was debatable; the European Courtof Justice had essentially not considered the relevant provision; and the provision has beentransposed in different ways throughout the EU.154 In such circumstances it must, at least,be arguable that an interpretative reference to the European Court of Justice was requiredin Abbey.155 Yet the Supreme Court, with variable assurance (and some controversy),156 feltthat it was unnecessary to make such a reference. Spearheading this stance was the view ofLord Walker157 (which was essentially supported by Lord Mance158 and Lady Hale)159 thatthe issue was acte clair. However, as even Lord Walker came close to conceding,160 such aview is difficult to sustain given the differing views of “very experienced”161 judges in thecourse of this litigation; and, one might add, the views of judges in other cases (and, indeed,in Abbey Lord Phillips (supported to some extent by Lord Neuberger)162 did not find theissue acte clair).163 Perhaps as a result of these difficulties, Lord Mance sought to buttressthe acte clair argument by stating:


151 See, for example, I Brown, Commercial Law (London: Butterworths 2000), pp. 457–8.152 [1972] AC 441.153 See n. 15 above.154 Schulte-Nölke, EC Consumer Law Compendium, n. 100 above.155 Cf. P Davies, “Bank charges in the Supreme Court’ (2010) 69 Cambridge Law Journal 21, p. 23.156 Ibid.157 OFT v Abbey National plc [2009] UKSC 6, paras 48–50.158 Ibid. paras 115–17.159 Ibid. para. 92.160 Ibid. para. 49.161 Ibid.162 Ibid. para. 120.163 Ibid. para. 91.

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In the present case, we are concerned with a relatively simple sentence, usingsimple and basic concepts, and the scope for different readings of differentlanguage texts seems very limited.164

The task, of course, may be relatively straightforward if a literal-leaning approach is tobe adopted; yet, as noted above, Article 4(2) of the Directive is an uneasy compromiseprovision, the purpose(s) for which is debatable; and, given the fact that internal marketgoals may evolve as the internal market itself evolves,165 the fact that a provision has beentransposed in different ways throughout the EU is not without significance.

A secondary argument, advanced by Lords Walker and Mance for not referring thematter to the European Court of Justice, relied on a distinction between the construction ofArticle 4(2) and the application of Article 4(2); they argued, with some justification,166 thatthe former was a matter for EU law whereas the latter was a matter for domestic law.167

More specifically, they argued that even if the Court of Appeal were correct in itsconstruction of Article 4(2), the Court of Appeal was incorrect in its application of thisconstruction of Article 4(2) to the facts;168 accordingly, so the argument went, the correctinterpretation of Article 4(2) was not central to the determination of the appeal and,therefore, a reference to the European Court of Justice was not necessary.

Such reasoning is, of course, superficially attractive. Yet, it is not clear that this reasoningentirely separates questions of law from questions of fact; more specifically the conclusionthat the Court of Appeal wrongly applied its interpretation of Article 4(2) is dependent ona particular view of the core/ancillary-terms dichotomy which, surely, is partly a question oflaw. There is also a wider issue: this argument effectively concedes that the Supreme Courtmay have been wrong on the question of interpretation!

Whatever the “formal” reasons for concluding that a reference to the European Courtof Justice was not necessary, it seems that there were wider considerations at play. Inparticular, the Supreme Court seemed concerned by the delay which a reference mightentail.169 This was, of course, not the first time that concerns about the efficiency of thereference process had been raised. For example, in Page v Combined Shipping and Trading Co.Ltd170 Staughton LJ stated:

We have been shown the French, German and Italian versions all of which usethe word “normal/normale” instead of “proper”. That does not necessarilymean the same as “normal” in English; similarities in language can be deceptive.It seems to me, in short, that we ought to conclude that Mr Page has a goodarguable case for recovering a substantial sum. It may well be that when thiscomes to trial we shall have to refer the problem to the European court, and itwill take another two years after that before a decision emerges as to what the


164 OFT v Abbey National plc [2009] UKSC 6, para. 115.165 See also the comment of Bingham J in Customs and Excise Commissioners v Samex [1983] 3 CMLR 194, para. 31,

that the ECJ “has a panoramic view of the Community and its institutions, a detailed knowledge of the treatiesand of much subordinate legislation made under them, and an intimate familiarity with the functioning of theCommunity market which no national judge denied the collective experience of the Court of Justice couldhope to achieve”.

166 Cf. Freiburger Kommunalbauten GmbH Baugesellschaft & Co KG v Ludger Hofstetter and Ulrike Hofstetter [2004] ECR-I 3403, para. 22, where the European Court of Justice noted that it “may interpret general criteria usedby the Community legislation in order to define the concept of unfair terms. However, it should not rule onthe application of these general criteria to a particular term.”

167 OFT v Abbey National plc [2009] UKSC 6, paras 50 and 116 respectively.168 Ibid.169 See, for example, ibid. para. 50, per Lord Walker (with whom Lady Hale and Lord Neuberger agreed).170 [1996] CLC 1952.

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regulation really means. Maybe the parties will think there are better methods ofspending their time and their money than disputing that for a long period oftime. But for the present it is enough for us to say, I think, that there is a goodarguable case.171

Yet, even if such considerations are legitimate as a matter of EU Law,172 it is somewhatironic that the Supreme Court argued – as a reason not to make a reference to the EuropeanCourt of Justice – that there was a “public interest” in resolving the issue quickly given, forexample, the number of stayed cases awaiting its decision:173 we have already seen, that byfocusing on a very narrow issue whilst opaquely hinting174 that there may be a possibilityto challenge the charges in question under the Regulations, the Supreme Court’s decision isless than helpful from a case management point of view! But were there other driversbehind the Supreme Court’s decision?

The impact of the banking crisis?

The Supreme Court ruled on the Abbey appeal in the immediate aftermath of the bankingcrisis; and one does not have to be a conspiracy-theorist to wonder whether or not a(perhaps perceived) vulnerability on the part of banks175 (and the associated impact on theeconomy)176 in any way impacted (not necessarily illegitimately) on the Supreme Court’sruling in Abbey.177 Of course, we will probably never know for sure but the consequencesof a ruling against the banks in Abbey do make for stark reading: Lord Walker noted that in2006 alone the banks (by which he presumably meant the banks involved in the Abbeyappeal) made approximately £2.56 billion from these charges178 (which equated toapproximately one-third of the revenue made on current accounts);179 “manythousands”180 of cases against banks on this issue were stayed in the County Courtspending a decision in Abbey; and, presumably, the limitation clock would only begin tickingonce the Supreme Court handed down its judgment.181


171 [1996] CLC 1952, p. 1956.172 Cf. Twigg-Flesner, The Europeanisation of Contract Law, n. 87 above, pp. 130–3.173 Lord Walker suggested that there may be thousands of such cases: OFT v Abbey National plc [2009] UKSC 6,

para. 17.174 See, for example, ibid. para. 91, per Lord Phillips.175 See M Kenny, J Devenney and L. Fox-O’Mahony, “Conceptualising unconscionability in Europe: in the

kaleidoscope of private and public law” in M Kenny, J Devenney and L Fox-O’Mahony, Unconscionability inEuropean Private Financial Transactions: Protecting the Vulnerable (Cambridge: CUP 2010), p. 377, at p. 378.

176 Cf. Wishart, “Transparency and fairness”, n. 27 above, p. 158.177 Ibid.178 OFT v Abbey National plc [2009] UKSC 6, para. 36.179 Ibid. para. 47.180 Ibid. para. 17, per Lord Walker.181 See Limitation Act 1980, s. 32(1) and Kleinwort Benson Ltd v Lincoln CC [1999] 2 AC 349. Indeed, one is

reminded of the words of Lord Browne-Wilkinson in that case, at p. 363: “Much commercial and propertyactivity occurs on the basis of law which is not laid down by judicial decision. Such ‘law’ consists of thepractice and understanding of lawyers skilled in the field. If, before payment, the payer had sought advice insome cases he would have been told that the law was dubious: if having received such advice he paid over, hemust have taken the risk that the law was otherwise and cannot subsequently recover what he has paid. Inother cases, he would have been told that the law was clear and he could safely act on it. If in this latter casethe payer acted on the law as so advised and subsequently a court held that the law was not as advised, canthe payer recover his payment as moneys paid under a mistake of law? In the ordinary case, the payer’s adviserwill just have given wrong legal advice: as a result the payment will have been paid under a mistake of law andwill be recoverable. But in a limited number of cases, of which this may be one, it is not really possible to saythat the legal adviser made a mistake in advising as he did . . . It used to be said that the practice ofconveyancers of repute was strong evidence of real property law: see In re Hollis’ Hospital Trustees and Hague’s

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Implications for EU harmonisation

As suggested above, there are various lessons in Abbey for any EU harmonisation agenda:lessons relating the role of the judiciary in EU harmonisation;182 lessons for the EUharmonisation agenda on the role of the legislatures in individual Member States; the needfor an efficient and robust reference procedure to the European Court of Justice, and soforth. There is also a wider issue relating to the exercise of determining whether or not aparticular clause is “unfair”. As noted above, the key provision is Regulation 5:

A contractual term which has not been individually negotiated shall be regardedas unfair if, contrary to the requirement of good faith, it causes a significantimbalance in the parties’ rights and obligations arising under the contract, to thedetriment of the consumer.

An insight into (part of) this exercise can be found in Director General of Fair Trading vFirst National Bank plc183 where Lord Bingham stated:

Good faith in this context is not an artificial or technical concept; nor, since LordMansfield was its champion, is it a concept wholly unfamiliar to British lawyers.It looks to good standards of commercial morality and practice.184

The important point for present purposes is that this exercise appears to be loaded withsocial, economic and behavioural norms and, as I have argued elsewhere,185 there are cleardifferences in such norms throughout the EU in the broad context of financial transactions.For example, one might refer to the significant differences in the operation of the doctrineof undue influence, in the context of non-professional surety protection, when comparingIreland with England and Wales.186

Returning to Abbey, the Supreme Court did not state that the charges in question couldnever be challenged under the Regulations. As Lord Phillips stated:

I do not believe any challenge to the fairness of the Relevant Terms has beenmade on the basis that they cause the overall package of remuneration paid bythose in debit to be excessive having regard to the package of services receivedin exchange. In these circumstances the basis on which I have answered thenarrow issue would seem to render that issue academic. It may be that, if andwhen the OFT challenges the fairness of the Relevant Terms, issues will be raisedthat ought to be referred to Luxembourg. That stage has not yet been reached.187


181 [cont.] Contract [1899] 2 Ch. 540, 551 . . . [and] Denning L.J. said in In re Downshire Settled Estates; Marquess ofDownshire v. Royal Bank of Scotland [1953] Ch. 218 , 279: ‘The practice of the profession in these cases is thebest evidence of what the law is; indeed, it makes law.’ . . . I doubt whether today anyone would claim that auniform practice of the profession makes the law. But in the present context it does have a significant impact.In holding that money paid under a mistake of law is recoverable, an essential factor is that the retention ofthe money so paid would constitute an unjust enrichment of the payee . . . If, at the date of payment, it wassettled law that payment was legally due, I can see nothing unjust in permitting the payee to retain moneys hereceived at a time when all lawyers skilled in the field would have advised that he was entitled to receive themand the payer was bound to pay them.”

182 Cf. Colombi Ciacchi, “Non-legislative harmonisation”, n. 53 above.183 [2002] UKHL 52.184 Ibid. para. 17.185 M Kenny and J Devenney, “The fallacy of the common core: polycontextualism in surety protection – a hard

case in harmonisation discourse” in M Andenæs and C Andersen (eds), The Theory and Practice of Harmonisation(Cheltenham: Edward Elgar 2011).

186 See P O’Callaghan, “Protection from unfair suretyships in Ireland” in Colombi Ciacchi (ed.), Protection of Non-Professional Sureties, n. 61 above; J Mee, “Undue influence and bank guarantees” (2002) 37 Irish Jurist 292.

187 OFT v Abbey National plc [2009] UKSC 6, para. 91.

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Yet any such challenge would probably, at least by implication, need to challenge theparticular cross-subsidy which banks employ in the United Kingdom’s largely “free if incredit” banking system; and it is submitted that it would be a brave court that wouldcategorise such an ingrained system as “unfair”. The point is, of course, that any EUharmonisation agenda in this area is constrained by, for example, social and cultural norms:

different benchmarks in member states when reviewing contractual terms . . .Accordingly, traders cannot use a contractual clause which is valid across the EU,but must instead formulate different clauses for each member state. Hence,considerable obstacles to the functioning of the internal market exist. Providerscan only perform pre-formulated contracts across borders with considerabletransaction costs.188

Nor is there any real EU jurisprudence on unfair terms189 to inform the exercise,meaning that “harmonisation under the Directive is more apparent than real”.190

Conclusions

As Lord Walker candidly acknowledged,191 the decision of the Supreme Court in OFT vAbbey National plc is likely to be a disappointment for many consumers. It is, of course, truethat the Supreme Court did not fully shut the door on the possibility of a successfulchallenge to the relevant charges under the Regulations. Yet – given that any such challengewould probably, at least by implication, need to challenge the particular cross-subsidy whichbanks employ in the United Kingdom’s largely “free if in credit” banking system – thechances of such a challenge being successful seem remote. This underlines the difficulty ofharmonising across the EU concepts, such as “unfairness”, which are loaded with social,economic and behavioural norms.192 Indeed, Abbey illustrates some of the other challengesfor any EU harmonisation agenda. In particular, Abbey raises issues in relation to thetransposition of EU Directives. As noted above, the Regulations follow very closely thewording of the Directive. Whilst such an approach to the implementation of the Directivemight be viewed as ensuring compliance with the obligations of the Directive, it can also,to an extent, be viewed as regrettable for, at least, three inter-related reasons. First, subjectto overriding EU obligations, EU Directives may provide a unique opportunity to developnational law in a rational, and non-fragmented, manner so as to meet EU obligations. Onemay, of course, lament the overlap between the Regulations and the Unfair Contract TermsAct 1977;193 and one might, encouraged by the views of the Law Commission,194 wish forone discrete, self-contained piece of legislation on unfair terms. Yet, there is a wider issuehere: the method used to transpose the Directive does little to promote coherence indomestic law by, for example, seeking to accommodate it within the traditional theoreticaldichotomy in English law between procedural and substantive unconscionability195 (even ifthat theoretical framework might have needed to be developed for such a purpose).196


188 Schulte-Nölke, EC Consumer Law Compendium, n. 100 above. Cf. also the German cases on bank charges whichare discussed by M Kenny, “Orchesrating sub-prime consumer protection in retail banking: Abbey Nationalin the context of Europeanised private law” (forthcoming 2011) European Review of Private Law.

189 See n. 60 above.190 Report on Directive 93/13/EEC on Unfair Terms in Consumer Contracts (Com (2000) 248 final), p. 30.191 OFT v Abbey National plc [2009] UKSC 6, para. 52.192 See Kenny et al., “Conceptualising unconscionability”, n. 175 above.193 Cf. Peel, Treitel, n. 38 above, pp. 290–2.194 Law Commission, Unfair Terms in Contracts, Law Comm. No 292 (2005).195 See, for example, Hart v O’Connor [1985] 2 WLR 944, para. 958, per Lord Brightman, discussed in Devenney

and Chandler, “Unconscionability”, n. 145 above, pp. 544–51.196 Cf. Teubner, “Legal irritants”, n. 57 above.

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Secondly, such an approach may (as was arguably the case in Abbey) encourage, andostensibly legitimise, a purely literal approach to the interpretation of measures whichtranspose EU directives. Thirdly, where the relevant directive, as is argued to be the casehere, contains essentially an uneasy and somewhat opaque political compromise provision,which needs to be interpreted against complex economic and social considerations, thisapproach to transposition essentially abdicates the task of cutting through the knot to thejudiciary. Yet it is not clear that the judiciary is always best placed to provide theAlexandrian-like solution; and, indeed, to some extent in Abbey, Lord Walker197 and LadyHale198 pushed the responsibility back to Parliament.199


197 OFT v Abbey National plc [2009] UKSC 6, para. 50.198 Ibid. para. 92.199 See also BBC interview with Vince Cable MP, “Vince Cable: banks continue to rip customers off ”, available

at www.bbc.co.uk/news/uk-10664533. Cf. position of OFT, available at www.oft.gov.uk/OFTwork/markets-work/completed/personal/.

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We need to talk: “democratic dialogue”and the ongoing saga of prisoner

disenfranchisementC R G MURRAY*

Lecturer, Newcastle Law School

NILQ 62(1): 57–74

Abstract

Challenges to prisoner disenfranchisement in the United Kingdom have persisted for more than a decade,progressing through the domestic courts to the European Court of Human Rights and back again. The issuehas been subject to a prolonged two-stage consultation. And yet, in spite of the decision in Hirst v UK(No 2) that the current disenfranchisement regime breaches the right of prisoners to vote, the governmentsin office since this decision have to date declined to introduce legislation to rectify the breach. This articleconsiders the response of the United Kingdom’s domestic courts to this situation, focusing upon the generalunwillingness of the courts to confront the government over the stalled reform process and the implications ofthis reluctance for the operation of the Human Rights Act 1998 (HRA). The prisoner enfranchisementcases give rise to important questions regarding the domestic courts’ discretion to re-interpret provisions so asto bring the law within the margin of appreciation and whether multiple declarations of incompatibilityshould be issued if the government fails to respond to the first in an appropriate and timely manner.Key words: prisoner disenfranchisement; right to vote; Human Rights Act; separation ofpowers; margin of appreciation

Introduction

The issue of prisoner voting rights in the United Kingdom has remained unresolved sincethe decision of the European Court of Human Rights’ Grand Chamber in Hirst v UK

(No 2).1 Hirst, serving a life sentence for voluntary manslaughter, claimed that the denial ofhis right to vote at the 2001 general election constituted an infringement of Article 3 ofProtocol 1 of the European Convention on Human Rights (ECHR), by which states“undertake to hold free elections at reasonable intervals by secret ballot, under conditionswhich will ensure the free expression of the opinion of the people in the choice of thelegislature”. Prison officials had refused his requests to be added to the register of electorson the basis of the Representation of the People Act 1983, which provides that “[a] convictedperson during the time that he is detained in a penal institution in pursuance of his sentence. . . is legally incapable of voting at any parliamentary or local government election”.2

* My thanks to Kevin J Brown (Newcastle University), Roger Masterman (Durham University), RichardMullender (Newcastle University) and Aoife O’Donoghue (Durham University) for their advice andcomments upon earlier drafts of this article. Any errors remain my own.

1 Hirst v United Kingdom (No 2), App. No 74025/01 (2006) 42 EHRR 41.2 Representation of the People Act 1983, s. 3(1).

Ultimately, the Grand Chamber recognised that the blanket ban on prisoner votingviolated the right to vote, rejecting the United Kingdom government’s suggestions that“imprisonment after conviction involves the forfeiture of rights beyond the right to liberty,and especially the assertion that voting is a privilege not a right”.3 The reform process whichwould ordinarily be set in motion by such a decision was, however, stymied by a pair ofprolonged consultations. These consultations did not commence until over a year after theGrand Chamber’s decision4 and only concluded in September 2009.5 This represents asignificantly delayed and, according to Parliament’s Joint Committee on Human Rights(JCHR), “disproportionate”6 consultation process which made a mockery of the Labourgovernment’s original assurances that remedial legislation would be introduced by October2007.7 By the time of the 2010 general election, prisoners remained unable to vote in theUnited Kingdom. This situation drew severe criticism from the Council of Europe’sCommittee of Ministers, which:

[E]xpressed profound regret that despite the repeated calls of the Committee,the United Kingdom general election was held on 6 May 2010 with the blanketban on the right of convicted prisoners in custody to vote still in place.8

This rebuke calls into question the “hands-off ” approach of the United Kingdom’sdomestic courts during the attenuated reform process. In evaluating their performance, thisarticle firstly considers the Grand Chamber’s decision in Hirst that the United Kingdom’sblanket disenfranchisement of prisoners was incompatible with Article 3 of Protocol 1,which provided the backdrop to the domestic courts’ responses to renewed challenges tothe voting ban. Faced with the Labour government’s protracted consultations, prisonersattempted to enforce the right to vote at various elections held in the United Kingdom(including elections for devolved institutions and European Parliament elections),confronting courts in Scotland,9 Northern Ireland,10 and England and Wales11 with theongoing breach of their right to vote. The courts’ reactions to these challenges showcasethe limitations upon the remedial mechanisms established under the HRA where agovernment prevaricates rather than addressing an identified breach. These cases also betraythe discomfort of some judges with suggestions that, under the HRA, the judiciary shouldengage in a “democratic dialogue” with other branches of government.12 This discomfortmanifested itself in the failure of these courts to address the limitations of the existingreform proposals on prisoner enfranchisement. Therefore, if the HRA is generally regardedas being responsible for a “quantum leap into a new legal culture of fundamental rights and


3 Hirst (No 2) (2006) 42 EHRR 41, para. 75.4 See Consultation Paper CP39/06, Voting Rights of Convicted Prisoners Detained within the United Kingdom: The UK’s

response to the Grand Chamber of the European Court of Human Rights judgment in Hirst v United Kingdom,14 December 2006, available at www.dca.gov.uk/consult/voting-rights/cp2906.pdf.

5 See Consultation Paper CP6/09, Voting Rights of Convicted Prisoners Detained within the United Kingdom: Second StageConsultation, 8 April 2009, www.justice.gov.uk/consultations/docs/prisoner-voting-rights.pdf.

6 JCHR, 16th Report of 2006–07, Monitoring the Government’s Response to Court Judgments Finding Breaches of HumanRights, 18 June 2007, HL Paper 128/HC 728, para. 78.

7 See Smith v Scott [2007] CSIH 9, para. 40.8 CM/Del/Dec (2010) 1086/18, 7 June 2010, 1086th Meeting (DH).9 Smith [2007] CSIH 9 and Traynor v Secretary of State for Scotland [2007] CSOH 78.10 Toner and Walsh [2007] NIQB 18.11 R (Chester) v Secretary of State for Justice [2009] EWHC 2923 (Admin).12 See R Clayton QC, “Judicial deference and ‘democratic dialogue’: the legitimacy of judicial intervention under

the Human Rights Act 1998” (2004) PL 33.

freedoms”,13 the reluctance of the courts to hasten this particular reform process helps usto measure the limits of this jump.

Slow progress towards prisoner enfranchisement in the UK’s courts

The now vexed issue of prisoner disenfranchisement was long neglected by the UnitedKingdom’s courts. Reviewing Canadian and American cases on prisoners’ rights in the1970s, Graham Zellick admitted that, by contrast, within the legal systems of the UnitedKingdom, “the law for most purposes tends to stop at the prison gates, leaving the prisonerto the almost exclusive control of the prison authorities”.14 In the 1960s and 1970s thecourts in the United States had to determine a series of cases on voting rights and the rightsof offenders. These streams of jurisprudence merged in the case of Richardson v Ramirez,15

a challenge to the continuing disenfranchisement of offenders even after their release.Although Justice Rehnquist conceded that “the more enlightened and sensible” approach tocriminal justice would be to harness the rehabilitative potential of such an extension of thefranchise, the Supreme Court ultimately decided to leave the issue to state legislatures.16

Whilst the ongoing disenfranchisement of offenders after their release was thereforepushed up the political agenda in the United States by such legal challenges, the dearth ofsimilar litigation by prisoners in the United Kingdom in this era can largely be explained bythe historic restrictions on their access to the courts imposed as part of the ancient conceptof “civil death”.17 Even after the restrictions on the ability of prisoners to access the courtswere repealed,18 and despite prisoners gaining access to legal aid to fund litigation,19 thePrison Rules continued to curtail prisoners’ ability to conduct their legal affairs withoutleave from the Home Secretary.20 The courts, until the 1980s, remained reluctant toquestion the operation of the Prison Rules,21 cowed by Goddard LJ’s assertion that:

It would be fatal to all discipline in prisons if governors and warders had toperform their duty always with the fear of an action before their eyes if they inany way deviated from the rules.22

The courts’ prolonged failure to address prisoners’ rights left the domestic legal systemsincreasingly out of step with other common law jurisdictions.23 Pressure on the courts’stance culminated in Lord Wilberforce’s acceptance, in Raymond v Honey,24 that “a convictedprisoner, in spite of his imprisonment, retains all civil rights which are not taken away

“Democratic dialogue” and the ongoing saga of prisoner enfranchisement

13 W Wade, “Human rights and the judiciary” (1998) EHRLR 520, p. 532.14 G Zellick, “Prisoners’ rights in England” (1974) 24 UTLJ 331, p. 331.15 Richardson v Ramirez (1974) 418 US 24.16 Ibid. p. 55.17 For an explanation of the legal disabilities which Parliament imposed on prisoners until the Criminal Justice

Act 1948, see the Forfeiture Act 1870, s. 8.18 See Criminal Justice Act 1948, s. 70(1).19 See Legal Aid and Advice Act 1949, s. 7. These provisions are now contained within the Access to Justice Act

1999, s.7.20 Prison Rules 1964 (SI 1964/388), r. 34(8). This situation persisted until a prisoner complained to the European

Commission of Human Rights in Knechtl v United Kingdom, App. No 4115/69, 13 YB European Convention onHuman Rights 730.

21 See M Loughlin and P Quinn, “Prisons, rules and courts: a study in administrative law” (1993) 56 MLR 497,p. 501.

22 Arbon v Anderson [1943] KB 252, p. 255. In the late 1970s, Shaw LJ echoed this proposition, asserting thatunder the Prison Act “the courts have no defined place and no direct or immediate function” in R v Board ofVisitors of Hull Prison ex parte St Germain [1979] 1 QB 425, p. 454.

23 See S Easton, “Constructing citizenship: making room for prisoners’ rights” (2008) 30 JSWFL 127, p. 135.24 Raymond v Honey [1983] 1 AC 1.

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expressly or by necessary implication”.25 For Susan Easton, this decision and the caseswhich followed “brought the prisoner and prison life firmly back within the notion ofcitizenship and into the arena of judicial scrutiny”.26 Nevertheless, governments continuedto argue that rights, including the right to conduct privileged legal correspondence27 andright of access to journalists,28 became privileges for the duration of an individual’simprisonment. In response, the courts reaffirmed that, whilst imprisonment necessarilyentails a curtailment of rights beyond the liberty of the individual, this does not mean thatother rights are extinguished.29

When, drawing upon this sea change in the judiciary’s approach to prisoner rights, threeindividuals held in English prisons ultimately challenged their disqualification fromvoting,30 they argued that the right to vote could not be removed as incidental uponimprisonment. Jack Straw, the then Home Secretary, persisted with the argument that anindividual’s ability to vote is a function of his or her good citizenship, asserting thatdetention was but “one element” of punishment and that “[r]emoval from society meansremoval from the privileges of society, amongst which is the right to vote for one’srepresentative”.31 Given the courts’ acceptance since Raymond v Honey that imprisonmentprimarily involved a deprivation of liberty, this familiar proposition appeared to place thegovernment on unstable ground. Nonetheless, in Pearson and Martinez, the Divisional Courtdifferentiated the right to vote from rights such as access to a journalist, with Kennedy LJasserting that:

[There is] no reason why Parliament should not, if so minded, in its dual role aslegislator in relation to sentencing and as guardian of its institutions, order thatcertain consequences shall follow upon conviction or incarceration withouttransgressing in any way the philosophy expounded in Raymond v Honey.32

The Divisional Court heard Pearson and Martinez less than six months after the HRAcame into operation. This altered context raised the case’s profile. Immediately prior to thehearing, the shadow Home Secretary, Ann Widdecombe, condemned this “darn silly” caseas the upshot of permitting individuals to claim that the state had breached the ECHR inthe domestic courts.33 Her comments could also be read as agitating for the rejection of theclaim, especially as she skirted the sub judice rule by speaking outside Parliament.34 TheDivisional Court’s judgment, perhaps with one eye to the controversy surrounding the case,mirrored the US Supreme Court decision in Richardson v Ramirez that reform was a matterfor the legislature.35 It accepted that:


25 Raymond v Honey [1983] 1 AC 1, p. 10. In making this assertion Lord Wilberforce acknowledged the influenceof the Canadian Supreme Court’s decision in Solosky v The Queen (1979) 105 DLR (3d) 745.

26 Easton, “Constructing Citizenship”, n. 23 above, p. 136.27 R v Secretary of State for the Home Department ex parte Leech (No 2) [1994] QB 198.28 R v Secretary of State for the Home Department ex parte Simms [2000] 2 AC 115.29 See ex parte Leech [1994] QB 198, p. 209, per Steyn LJ. See also ex parte Simms [2000] 2 AC 115, p. 143, per Lord

Hobhouse.30 R (Pearson and Martinez) v Secretary of State for the Home Department [2001] EWHC 239 (Admin).31 Ibid. para. 9.32 Ibid. para. 18.33 BBC News, 21 March 2001, http://news.bbc.co.uk/1/hi/uk/1233084.stm.34 It should be noted that, under the sub judice rule in force at the time, a civil case could be discussed by MPs in

Parliament where it related to issues of national importance. See Select Committee on Procedure, Matters SubJudice, 4th Report of Session 1971–72, 27 June 1972, HC 298.

35 Richardson (1974) 418 US 24.

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[T]here is a broad spectrum of approaches among democratic societies [toprisoner disenfranchisement], and the United Kingdom falls into the middle ofthe spectrum . . . its position in the spectrum is plainly a matter for Parliamentnot for the courts.36

Hirst v UK: the breach of the right to vote

The third claimant in Pearson and Martinez, John Hirst, remained unconvinced that his desireto vote was “darn silly”. He successfully pursued his case before the European Court ofHuman Rights.37 The Labour government responded to this setback by requesting that thecase be referred to the Grand Chamber,38 arguing once more that the punishment of beingbanned from voting had the effect of “enhancing civic responsibility and respect for therule of law by depriving those who had breached the basic rules of society of the right tohave a say in the way such rules were made for the duration of their sentence”.39 Hirstcountered that the blanket ban was disproportionate, being “unrelated to the nature orseriousness of the offence and varied in its effects on prisoners depending on whether theirimprisonment coincided with an election”40 and that, contrary to the government’sassertions, it “took away civic responsibility and eroded respect for the rule of law, servingto alienate prisoners further from society”.41

Accepting that automatic disenfranchisement infringed the right to vote, the GrandChamber evidently considered that the Labour government’s stance was predicated on aconcern for the general public’s perceived antipathy towards prisoner enfranchisement:

There is . . . no question that a prisoner forfeits his Convention rights merelybecause of his status as a person detained following conviction. Nor is there anyplace under the Convention system, where tolerance and broadmindedness arethe acknowledged hallmarks of democratic society, for automaticdisenfranchisement based purely on what might offend public opinion.42

As Steve Foster acknowledges, however, the Grand Chamber did not reject all votingrestrictions on prisoners. Rather, “it accepted, at least in principle, that the right to vote maybe lost as part of an individual sentence”.43 The Grand Chamber refused to criticise theUnited Kingdom’s argument that removal of the vote from individuals in response to theircriminal conviction had the potential to encourage good citizenship. It asserted that therewas “no reason in the circumstances of this application to exclude these aims as untenableor per se incompatible with the right [to vote]”.44 Instead, the majority emphasised that itwas the blanket nature of the disenfranchisement imposed by the Representation of thePeople Act 1983 which breached Article 3 of Protocol 1, on the basis that “the principle ofproportionality requires a discernible and sufficient link between the sanction and theconduct and circumstances of the individual concerned”.45 These statements indicate theinterplay between proportionality and margin of appreciation in Hirst. Building upon thewide margin of appreciation in this field, the Grand Chamber’s approach recognised the


36 Pearson and Martinez [2001] EWHC Admin, para. 41.37 Hirst v United Kingdom (No 2) (2004) 38 EHRR 40.38 Hirst (No 2) (2006) 42 EHRR 41.39 Ibid. para. 50.40 Ibid. para. 45.41 Ibid. para. 44.42 Ibid. para. 70.43 S Foster, “Reluctantly restoring rights: responding to the prisoner’s right to vote” (2009) 9 HRLR 489, p. 498.44 Hirst (No 2) (2006) 42 EHRR 41, para. 75.45 Ibid. para. 71.

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disproportionate nature of a blanket ban but allowed states to deny the vote to particularprisoners on the basis of the seriousness or nature of their offences.

In the aftermath of Hirst, the extent of the leeway provided to states in the GrandChamber’s decision was not widely recognised. The decision was portrayed by opponentsof the ban on prisoners voting as a fatal blow to the United Kingdom’s disenfranchisementregime. This was certainly how Hirst was received in Ireland, where legislation was quicklyenacted to end the disenfranchisement of prisoners.46 Piloting the Electoral (Amendment)Bill 2006 through the Dáil, Minister for the Environment, Heritage and Local Government,Dick Roche, could not resist highlighting the delays in the United Kingdom’s legislativeresponse to Hirst: “It is consulting; we are acting.”47 As recently as October 2008,Parliament’s JCHR claimed that Hirst provided “clear guidance that individuals’fundamental human rights, including the right to vote, are not contingent on theircontinuing to be ‘good citizens’”.48

This interpretation did not reflect the nuance inherent in the Hirst decision. By March2010, however, the Labour government had persuaded the JCHR to recognise that “theGrand Chamber left a broad discretion to the United Kingdom to determine how toremove the blanket ban”.49 The significance of this volte-face should not beunderestimated; Hirst was not the final word on prisoner voting rights. In the context of theUnited States, Andrew Shapiro has described the Supreme Court’s refusal to rule that felondisenfranchisement was unconstitutional in Richardson v Ramirez50 as condemningopponents of criminal disenfranchisement to a long-running battle through the statelegislatures, achieving only “piecemeal, incremental reform”.51 Similarly, the flexibility ofthe Grand Chamber’s decision in Hirst returned the focus of the debate overenfranchisement to the national institutions of states party to the ECHR.

After Hirst: consultations and renewed legal challenges

Using the full extent of the room for manoeuvre provided by the Hirst decision, the Labourgovernment’s response to the issue of prisoner enfranchisement was conditioned by thepolitical imperative not to be seen as “soft on crime”.52 Under the premierships of bothTony Blair and Gordon Brown, the Department for Constitutional Affairs and its successor,the Ministry of Justice issued consultation documents on reform (in December 2006 andApril 2009) which suggested that the government favoured, at most, a very limited


46 For a summary of the debates leading to the enactment of the Electoral (Amendment) Act 2006 in Ireland,see C Behan and I O’Donnell, “Prisoners, politics and the polls” (2008) 48 Brit J Criminol 319, pp. 326–8.

47 D Roche, TD, Dáil Éireann Debates, vol. 624, col. 1988, 5 October 2006.48 JCHR, 31st Report of 2007–08, Monitoring the Government’s Response to Human Rights Judgments: Annual Report

2008, 7 October 2008, HL Paper 173/HC 1078, para. 58.49 JCHR, 15th Report of Session 2009–10, Enhancing Parliament’s Role in Relation to Human Rights Judgments, 9

March 2010, HL Paper 85/HC 455. para. 107.50 Richardson (1974) 418 US 24.51 A Shapiro, “Challenging criminal disenfranchisement under the Voting Rights Act: a new strategy” (1993) 103

Yale LJ 537, p. 564. Despite these reforms, other writers have tracked rapid increases in the number ofindividuals disenfranchised under these provisions in the United States from the 1970s onwards. See C Uggenand J Manza, “Democratic contraction? The political consequences of felon disenfranchisement in the UnitedStates” (2002) 67 American Sociological Review 777.

52 During the 2010 general election, many Labour candidates, particularly those facing strong Liberal Democratchallenges, campaigned on the government’s refusal to extend the vote to prisoners. The national Labour Partyeven had to order one of its candidates to withdraw a leaflet attacking the Liberal Democrat policy oflegislating to enfranchise some prisoners on the basis of Hirst. The leaflet asserted: “Do you want convictedmurderers, rapists and paedophiles to be given the vote? The Lib Dems do”: BBC News, 19 April 2010,available at http://news.bbc.co.uk/1/hi/uk_politics/election_2010/8630001.stm.

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enfranchisement of prisoners. These consultations proceeded on the basis that “the moreserious the offence that has been committed, the less right an individual should have toretain the right to vote when sentenced to imprisonment”.53 The documents proposed thatfranchise restrictions would apply after a low threshold sentence and established that thegovernment would not countenance granting the vote to prisoners serving sentences ofmore than four years’ imprisonment.54 In Steve Foster’s opinion, these proposals were“aimed at allowing the government to encroach upon the prisoner’s right to vote to themaximum extent that might be allowed by the Convention and the European Court”.55

Progress towards enacting even these limited reforms was slow. After Strasbourg’s firstdecision in Hirst,56 Juliet Lyon, Director of the Prison Reform Trust, expressed her concernthat the Labour government would seek to delay the enfranchisement of prisoners untilafter the 2005 general election.57 Five years later an exasperated JCHR asserted that theobstacle blocking the reform process was simply that the issue of prisoner enfranchisementwas “legally straightforward, but politically difficult”.58 These delays returned theincompatibility of the disenfranchisement of prisoners under the ECHR to the arena of thedomestic courts. Nonetheless, following Hirst, prisoners might have hoped that domesticjudges would finally begin the task of “clearing the channels” of obstacles impeding theoperation of the democratic process,59 rather than perpetuating the deference historicallyshown to Parliament regarding voting rights.

The first case to arise in the wake of Hirst occurred as a result of the refusal of anelectoral registration officer to include William Smith, a prisoner held in HMP Glenochil,on the electoral register for the Scottish Parliament elections held in May 2003. Smith’sappeal against this decision was not heard until late 2006. Three Court of Session judgesrefused to “read down” s. 3 of the Representation of the People Act 1983 to conform withthe right to vote,60 but did issue a declaration of incompatibility recognising that thisprovision breached the ECHR.61 Soon after Smith came Toner and Walsh,62 an action boughtby two prisoners held in Northern Ireland prior to the Northern Ireland Assembly electionsheld in March 2007. Given the Grand Chamber’s recognition that the blanketdisenfranchisement of prisoners breached Article 3 of Protocol 1 and the recentdeclaration of incompatibility issued regarding the Representation of the People Act inSmith, the claimants’ challenge focused instead on invalidating Article 4 of the NorthernIreland Assembly (Elections) Order 2001. This secondary legislation set out that thefranchise for Northern Ireland Assembly elections mirrored that for local elections, therebyincorporating the ban on prisoner voting. However, Gillen J recognised that the root of theproblem remained the Representation of the People Act and that it would be “invidious to


53 Consultation Paper CP6/09, Second Stage Consultation, n. 5 above, p. 24.54 Ibid.55 S Foster, “Prisoners’ rights under threat: do prisoners retain their democratic rights?” (2007) 12 Cov LJ 42,

p. 49.56 Hirst (No 2) (2004) 38 EHRR 40.57 See M Dhami, “Prisoner disenfranchisement policy: a threat to democracy?” (2005) 5 Analyses of Social Issues

and Public Policy 235, p. 238.58 JCHR, 31st Report, n. 48 above, para. 62.59 J H Ely, Democracy and Distrust (Cambridge, MA: Harvard University Press 1980), p. 105.60 See Smith [2007] CSIH 9, para. 27.61 Ibid. para. 56.62 Toner and Walsh [2007] NIQB 18.

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invalidate an Order that would serve to disenfranchise the voting population of NorthernIreland in circumstances where the genesis of the problem manifestly lies elsewhere”.63

In Toner and Walsh, the delicate position of the peace process in Northern Ireland in thewake of the St Andrews’ Agreement,64 with the pending election potentially “an integralpart of that progress”,65 hung over the challenge to prisoner disenfranchisement. In thiscontext, Gillen J unsurprisingly refused to “take a risk laden step which would imperil orprejudice the forthcoming election at such short notice [and] would visit hardship anddetriment on the concept of good administration in Northern Ireland”.66 No suchimpediments weighed on the mind of Burton J in Chester.67 This case involved a claimantwho, like John Hirst, remained imprisoned in spite of completing the minimum-termelement of his life sentence.68 Peter Chester sought to register for the 2009 EuropeanParliament elections and claimed that his right to vote had been infringed after permissionto do so was denied. Burton J, giving the strong impression that he regarded this claim as adubious use of legal aid funding,69 refused to employ either s. 3 or s. 4 of the HRA inresponse to the breach of the right to vote.70 In all of these cases, the government acceptedthat the ban on voting, imposed on all convicted criminals serving custodial sentences,breached the right to vote. The reluctance of the courts to tackle this breach, which inChester manifested itself fully four years after the Grand Chamber’s ruling in Hirst, leaves anobvious question mark hanging over the effectiveness of the HRA’s remedial regime.

Judicial aversion towards the HRA’s re-interpretive power

The reluctance of the courts hearing prisoner enfranchisement to use s. 3 of the HRA tocreate exceptions to the ban on prisoner voting under the Representation of the People Act1983 arguably indicates a continued reticence amongst judges towards the rights ofprisoners. This HRA provision requires that, “[s]o far as it is possible to do so, primarylegislation and subordinate legislation must be read and given effect in a way which iscompatible with the Convention rights”.71 In Smith, the Registration Appeal Court ofScotland asserted that the blanket nature of the ban precluded the use of the re-interpretation provision as there was “no ‘grain of the legislation’ which could properlyserve as a starting point for any interpretation designed to clothe some or all of suchprisoners with voting rights”.72 Following the reasoning of Lord Nicholls in Re S(Minors),73 the court considered that re-interpreting s. 3 of the Representation of thePeople Act so as to allow any prisoners the vote would “depart substantially from afundamental feature of the legislation” and would amount to the court “legislating on itsown account”.74 Such refusals to caveat or read down these provisions, on the basis that


63 Toner and Walsh [2007] NIQB 18, para. 9(viii).64 This agreement, published on 13 October 2006, was the culmination of negotiations to restore the devolved

institutions within Northern Ireland, which had been suspended since 14 October 2002. The full text of theAgreement is available at http://web.archive.org/web/20080610001151/www.standrewsagreement.org/agreement.htm.

65 Toner and Walsh [2007] NIQB 18, para. 9(x).66 Ibid.67 Chester [2009] EWHC 2923 (Admin).68 Criminal Justice Act 2003, Sch. 22, para. 3.69 See Chester [2009] EWHC 2923 (Admin), para. 19.70 Ibid. paras 31 and 44.71 HRA, s. 3(1).72 Smith [2007] CSIH 9, para. 26. See also Ghaidan v Godin-Mendoza [2004] UKHL 30, para. 33, per Lord Nicholls.73 Re S (Minors) (Care Order: Implementation of Care Plan) [2002] UKHL 10, para. 40.74 Smith [2007] CSIH 9, para. 27.

doing so would amount to a fundamental alteration of the statute, are common across theprisoner enfranchisement cases.75

This reliance on the decision in Re S (Minors) was, however, misplaced. It neglected theemphasis which the Grand Chamber in Hirst placed on the lack of parliamentary debateconcerning the purpose of the voting ban (either when the modern formulation of the banwas adopted in the Representation of the People Act 1969, or since).76 This lack ofreasoning behind the imposition of the ban undermines the contention that stipulatingspecific exceptional categories of prisoners entitled to vote conflicts with any fundamentalstatutory purpose. As David Feldman noted before the HRA even entered force, the courts’new interpretative power could be usefully employed to place the onus on Parliament toexpress its legislative intention clearly.77 Put plainly, if Parliament fails to articulate thereasoning behind a measure (whether it is enacted before or after the HRA), the courtsshould be able to assess its core purpose and which features of the measure arefundamental to that purpose.

Furthermore, particular groups of prisoners can be separated from the prisonpopulation as a whole. Peter Chester had served the minimum-term element of his sentenceand was therefore being held not as a punishment, but on grounds of the risk which heposed to the public.78 Burton J rejected efforts to persuade him to address the particularissue of this category of prisoners. Succumbing to what Joseph Raz identified as thetraditional judicial animus towards “partial reform”,79 Burton J considered that a re-interpretation which sought to exclude this group of prisoners from the voting ban, on thebasis that removal of the vote was a punishment, would encourage further claims, leading“to piecemeal and possibly continuous amendments, without consideration by Parliament,of legislation dealing with matters of important social policy, all depending upon whichclaimant happened to be before the Court at any one time”.80 Locating this reasoningwithin the approach mapped out by Lord Nicholls in Re S (Minors), Burton J concluded thatthe potential for future litigation amounted to an “important practical repercussion”militating against re-interpretation.81 Similarly, in Smith, the Registration Appeal Courtaccepted that:

[T]here were many possible levels at which the line might be drawn for theenfranchisement or disenfranchisement of convicted prisoners in differentcategories, and it could be no part of this court’s function to make anuninformed choice among such alternatives.82

This reasoning also consciously echoes Lord Hobhouse’s speech in Bellinger v Bellinger,83

concerning whether the courts should employ s. 3 of the HRA to re-interpret “female”,under s. 11(c) of the Matrimonial Clauses Act 1973, to include a transsexual woman.Rejecting this course of action, Lord Hobhouse declared that it would involve “making alegislative choice as to what precise amendment was appropriate”.84 The context of this

“Democratic dialogue” and the ongoing saga of prisoner enfranchisement 65

75 See Chester [2009] EWHC 2923 (Admin), para. 26.76 See Hirst (No 2) (2006) 42 EHRR 41, para. 79.77 See D Feldman, “The Human Rights Act 1998 and constitutional principles” (1999) 19 LS 165, p. 186.78 Law Commission, Murder, Manslaughter and Infanticide, Law Comm No. 304 (2006), para. 1.58.79 J Raz, The Authority of Law (Oxford: OUP 1979), p. 201.80 Chester [2009] EWHC 2923 (Admin), para. 30.81 Re S [2002] UKHL 10, para. 40. See also Re P (Adoption: Unmarried Couple) [2008] UKHL 38, para. 55, per

Lord Hope.82 Smith [2007] CSIH 9, para. 26.83 Bellinger v Bellinger [2003] UKHL 21.84 Ibid. para. 78.

decision is, however, significant. The case of Goodwin v UK,85 in which Strasbourg concludedthat the Matrimonial Clauses Act 1973 breached Articles 8 and 12 ECHR, was decided onlysix months prior to the House of Lords’ hearing in Bellinger. The government had acceptedthe decision in Goodwin and announced that it was taking steps to rectify the breach throughlegislation even before the House of Lords heard Bellinger. Even in Smith, decided just overa year after the Grand Chamber’s decision in Hirst, the Registration Appeal Court drewattention to how quickly Parliament had reacted to Goodwin by comparison to Hirst.86

The backdrops to Bellinger and Chester are therefore markedly different. Chester wasdecided fully four years after Hirst. This delay may, of itself, have warranted a morepurposive judicial approach to the Representation of the People Act 1983, despite thepractical ramifications alluded to by Burton J. As Mary Arden has pointed out in her extra-judicial writing, even after Re S and Bellinger the courts are still “feeling their way towards aset of rules and canons of construction that will apply where section 3(1) is in point”.87

Chester represents a missed opportunity to refine the approach of the courts to the re-interpretive power. The ability of courts to re-interpret a provision “so far as it is possibleto do so” is arguably context specific. The courts should therefore take account of factorssuch as the duration of the identified breach in deciding whether to re-interpret a provision.At the very least, the four years of prevarication over reform that preceded Chester shouldhave alerted Burton J to the danger that his confident assertion that the provisions imposingthe voting ban “are imminently to be considered by the Legislature”88 would prove ahostage to fortune.

The “mirror” principle and the HRA’s re-interpretive power

Burton J went so far as to assert in Chester that, even if he did consider s. 3 of theRepresentation of the People Act 1983 to be capable of re-interpretation on the basis ofHirst, he would nonetheless refuse to do so.89 Nor is he alone in this assertion, for thedomestic courts assessing Hirst have uniformly rejected arguments that the GrandChamber’s decision mandated particular reforms. This unwillingness to countenance ajudicial solution to the issue of prisoner disenfranchisement is therefore an unexpected sideeffect of Strasbourg’s readiness in Hirst to grant leeway to the United Kingdom as to howto reform the voting ban. As Gillen J asserted in Toner and Walsh:

I am not persuaded . . . that the United Kingdom Government could and willonly find the approval of the European Court in circumstances wheredisenfranchisement was imposed by a sentencing judge . . . [I]t is clear to me thatinsofar as the court ventured onto this plane, their comments were non-prescriptive and purely advisory in character.90

Such advisory comments are not, of themselves, unusual. Strasbourg rarely mandatesspecific reforms on the finding of a breach of a particular human right,91 particularly in


85 Goodwin v UK (2002) 35 EHRR 447.86 Smith [2007] CSIH 9, para. 54.87 M Arden, “The interpretation of UK domestic legislation in the light of European Convention on Human

Rights jurisprudence” (2004) 25 Stat LR 165, p. 179.88 Chester [2009] EWHC 2923 (Admin), para. 29.89 Ibid. para. 30.90 Toner and Walsh [2007] NIQB 18, para. 9(iii).91 See, for example, Dickson v United Kingdom (2008) 46 EHRR 41, para. 89, where Strasbourg’s Grand Chamber

rejected an applicant prisoner’s request to direct the United Kingdom to urgently reconsider a decision not togrant him access to artificial insemination facilities, on the basis that “[t]he Court’s function is, in principle, torule on the compatibility with the Convention of the existing measures and it does not consider it appropriatein the present case to issue the requested direction”.

areas where the states enjoy a wide margin of appreciation.92 But mere “advice” fromStrasbourg does create a problem for the operation of the HRA, and particularly therequirement under s. 2(1) that the courts must “take into account” judgments of theEuropean Court of Human Rights in reaching their decisions. In the prisonerenfranchisement cases, this requirement was read in light of Lord Bingham’s exhortation inUllah93 that the courts should do no more than “keep pace with the Strasbourgjurisprudence as it evolves”.94 This approach has become known as the “mirror” principle,as it requires that the content of the rights incorporated under the HRA reflects the contentof the ECHR rights in Strasbourg jurisprudence.95 Constrained by this principle, thedomestic courts hearing the prisoner enfranchisement cases considered themselves unableto engage with the recommendations contained in Hirst, on the basis that acting uponadvice, as opposed to “clear and constant” Strasbourg jurisprudence,96 risked overrunningtheir mandate.97

Washing his hands of the issue of prisoner disenfranchisement, Burton J quoted directlyfrom the decision in Hirst. Strasbourg, he said, had sought to “leav[e] it to the legislature todecide on the choice of means for securing the rights guaranteed by [the ECHR]”.98 Thereference to the legislature in this passage should, however, be read as an unfortunate slipby the majority in Hirst. Strasbourg’s jurisprudence has never recognised that the process ofbringing a law within the margin of appreciation is solely a matter for a national legislature.Rather, in cases dating back to Handyside v United Kingdom,99 Strasbourg has asserted that themargin of appreciation “is given both to the domestic legislator . . . and to the bodies,judicial amongst others, that are called upon to interpret and apply the laws in force”.100

Strasbourg’s invocation of the margin of appreciation does not, therefore, simplyprovide domestic legislatures with scope for action, but also serves as an invitation to thedomestic courts to consider particular measures in light of the purposes of the ECHR.Whilst the courts can decline such invitations, perhaps on the basis of deference to electeddecision makers,101 doing so does not call into question their ability to act. Burton J’seagerness to leave this matter to the sole province of legislature, in spite of the delays inenacting reforms following Hirst, may nonetheless appear to be in line with the historicdeference of the domestic courts regarding voting rights. Indeed, this may have been anunderstandable approach, had counsel not directed him to Lord Hoffmann’s speech in theadoption case of Re P.102 In this case the House of Lords sought to refine the obligationto remain in line with Strasbourg jurisprudence, with Lord Hoffmann emphasising that:

When [the European Court of Human Rights] says that a question is within themargin of appreciation of a Member State, it is not saying that the decision must


92 See Hirst (No 2) (2006) 42 EHRR 41, paras 61 and 84.93 R (Ullah) v Special Adjudicator [2004] UKHL 26.94 Ibid. para. 20.95 J Lewis, “The European ceiling on human rights” [2007] PL 720, p. 720.96 To use the expression adopted by Lord Slynn in R (Alconbury Developments Ltd) v Secretary of State for the

Environment, Transport and the Regions [2001] UKHL 23, para. 26.97 It should be noted that addressing Strasbourg jurisprudence in these cases would not have brought these

courts into conflict with the principles of stare decisis. See Kay and others v London Borough of Lambeth and others[2006] UKHL 10, para. 43, per Lord Bingham.

98 Chester [2009] EWHC 2923 (Admin), para. 50. See also Hirst (No 2) (2006) 42 EHRR 41, para. 84.99 Handyside v United Kingdom (1976) 1 EHRR 737.100 Ibid. para. 48.101 See R v DPP ex parte Kebilene [2000] 2 AC 326, per Lord Hope, p. 381.102 In re P (and others) [2008] UKHL 38.

be made by the legislature, the executive or the judiciary. That is a matter for theMember State.103

Lord Hoffmann identified the task of developing the law within the margin ofappreciation as one basis upon which the courts could depart from the “mirror” principlein appropriate cases.104 The courts hearing the prisoner enfranchisement cases, as much asthe legislature, therefore had a role to play in bringing domestic law within the margin ofappreciation. Instead, the pervasive influence of this principle persuaded these courts thatit would not be possible to employ the HRA’s re-interpretive power. These cases indicatethat strict adherence to the rule in Ullah remains the safe option for High Court judgesseeking to avoid accusations that they are imposing novel burdens on public authorities,even as the appellate courts move away from the rigidity of the “mirror” principle.105

The prisoner enfranchisement cases therefore highlight the tension between theperceived functions of Strasbourg and the domestic courts. Strasbourg conceives its role asidentifying breaches of the ECHR rights and that, thereafter, the onus passes to anyrelevant institutions of the state in breach to bring its laws into conformity with theECHR.106 The prisoner enfranchisement cases, by contrast, indicate that many domesticjudges remain reluctant to employ their powers under s. 3 of the HRA unless Strasbourghas clearly established the minimum contents of a right. These cases indicate, that even ininstances, such as Hirst, where Strasbourg has provided advice as to how to bring domesticlaw in line with ECHR requirements, domestic judges will often seek refuge in a strictconception of the “mirror” principle to avoid having to re-interpret statutory provisions inline with such advice.

Declarations of incompatibility and the separation of powers

Even in light of the above analysis, re-interpreting the Representation of the People Act1983 to extend the vote to exceptional categories of prisoner would have been a radicalstep,107 although one arguably commensurate with the importance of the right to vote. Thequestion of whether to issue a declaration of incompatibility under s. 4 of the HRA,however, should have been much less controversial. In Bellinger, despite the government’scommitment to rectify the law in light of Goodwin, Lord Nicholls concluded that the Houseof Lords should use its discretion to issue a declaration and “formally record that thepresent state of statute law is incompatible with the Convention”.108 The court in Smithfollowed this lead, asserting that Lord Nicholls’ reasoning “applies equally, or with greaterforce, to this case”, and declared s. 3 of the Representation of the People Act 1983incompatible with the ECHR.109 In spite of the government’s assurances that it acceptedand was taking steps to rectify the law in light of Hirst,110 the court considered it necessary


103 In re P (and others) [2008] UKHL 38, para. 32.104 Ibid, para. 31.105 In addition to cases such as In re P and others [2008] UKHL 38 and R v Horncastle and others [2009] UKSC 14,

in which the House of Lords and Supreme Court qualified the “mirror” principle, Baroness Hale adopted aflexible conception of the reasoning underpinning the principle in Gentle: “[The courts] are not free to foistupon Parliament or upon public authorities an interpretation of a Convention right which goes way beyond anythingwhich we can reasonably foresee that Strasbourg might do”: R (Gentle and another) v Prime Minister and others [2008] UKHL20, para. 56 (emphasis added).

106 See N Krisch, “The open architecture of European Human Rights law” (2008) 71 MLR 183, pp. 213–15.107 See A Kavanagh, Constitutional Review under the UK Human Rights Act (Cambridge: CUP 2009), pp. 137–42.108 Bellinger [2003] UKHL 21, para. 55.109 Smith [2007] CSIH 9, paras 54–6.110 Ibid. para. 51.

to issue the declaration given that “the timetable [for reform] has indeed slipped, andslipped badly”.111

Still the Labour government did not act. By the time of the hearing in Chester thetimetable for reform had slipped by a further two years. Burton J, confronted with what heregarded as the exhaustion of the system of remedies established in the HRA, consideredthat there was nothing more that the courts could do in these circumstances. He refused touse his discretion to issue a further declaration of incompatibility, on the basis that “thereis no need for any declaration to be made by yet another court, as one has already beenmade which is binding on the UK Government”.112 His characterisation of the declarationissued in Smith as “binding” upon the government is, however, open to question. As GavinPhillipson asserts, a government’s use of its power under the HRA to amend legislation113

to rectify a declared incompatibility “is not and cannot be guaranteed”.114 Indeed, theLabour government had already expressed its intention not to fast-track reforms to thevoting ban under s. 10(2) of the HRA in the wake of Smith.115 Burton J’s description of theexisting declaration as binding was nonetheless a useful fiction. He asserted that, because a“binding” first declaration had been made, exercising his discretion to issue a seconddeclaration would not simply be redundant but contrary to the separation of powers:

Insofar as some pressure might have been intended to be brought to bear on theFirst Defendant . . . to act speedily in bringing forward legislation to Parliament,that would be . . . offensive to constitutional principles.116

Burton J’s refusal to issue a declaration on the basis that it would jeopardise theseparation of powers, while neglecting to criticise the government’s failure to rectify such along-standing breach of human rights, reveals his limited conception of the courts’ rolesince the enactment of the HRA. Academics have frequently mapped out an extensive rolefor declarations of incompatibility.117 Aileen Kavanagh, for example, trumpets the abilityof declarations to “grab the headlines”118 and thereby draw public attention to abuses ofhuman rights, whilst Richard Clayton identifies them as facilitating “democratic dialogue”between the branches of government regarding human rights.119 In the opposite camp,however, the former Court of Appeal judge Richard Buxton adopts a more mechanisticview of declarations as “principally a means of securing the reconciliation of Englishstatute law with the requirements of the ECHR, rather than as a forensic instrument for usein a particular case”.120 Buxton’s view won through in Chester, underscoring the opposition


111 Smith [2007] CSIH 9, para. 43.112 Chester [2009] EWHC 2923 (Admin), para. 34.113 HRA, s. 10(2).114 G Phillipson, “Deference, discretion, and democracy in the Human Rights Act era” (2007) 60 CLP 40, p. 67.

Richard Buxton similarly concludes that s. 4 “envisages, though it does not mandate, remedial action”,R Buxton, “The future of declarations of incompatibility” (2010) PL 213, p. 221. See also William Wade’scriticism that the “executive discretion” as to how to respond to a declaration of incompatibility is “contraryto the rule of law in its most basic sense”. Wade, “Human rights”, n. 13 above, p. 531.

115 Chester [2009] EWHC 2923 (Admin), para. 13.116 Ibid. para. 34.117 For Fiona de Londras and Fergal Davis, “[t]he declaration of incompatibility should be seen as a ‘moment’

capable of galvanizing parliamentary and popular dissent”. F de Londras and F Davis, “Controlling theexecutive in times of terrorism: competing perspectives on effective oversight mechanisms” (2010) 30 OJLS19, p. 46.

118 Kavanagh, Constitutional Review, n. 107 above, p. 230.119 Clayton, “Judicial deference”, n. 12 above, pp. 45–6. See also F Klug, “The Human Rights Act – a ‘third way’

or a ‘third wave’ Bill of Rights” (2001) EHRLR 361, p. 370.120 Buxton, “The future of declarations of incompatibility”, n. 114 above, p. 214.

of some judges to attempts by academic lawyers to conceptualise their role under the HRAas “a form of privileged pressure group whose function it is to raise good reasons why alitigant’s interests should be respected”.121 Given the institutional inertia inherent in thismind-set, it is unsurprising that some judges have sought to generate constitutionaldifficulties with the use of their powers under the HRA.122

The Chester decision indicates both the discretionary nature of declarations ofincompatibility and the fact that declarations, where issued, are not enforceable. Thesefactors will continue to prevent the European Court of Human Rights from accepting thatdeclarations constitute an effective remedy.123 In Burden v United Kingdom, the GrandChamber acknowledged that:

[I]t cannot be excluded that at some time in the future the practice of givingeffect to the national courts’ declarations of incompatibility by amendment ofthe legislation is so certain as to indicate that s. 4 of the Human Rights Act is tobe interpreted as imposing a binding obligation.124

However, at that time, due to the “relatively small number of such declarations that havebecome final”,125 Strasbourg declined to recognise s. 4 as providing an effective remedy.Such reticence would appear to be vindicated by the saga of the prisoner enfranchisementcases. These cases affirm Conor Gearty’s view that s. 4 “amounts to little more than a cryfor action”.126 Worse, if Burton J’s refusal to use his discretion to issue a second declarationis followed by other courts, the judiciary would be limited to only ever crying out once inresponse to a breach of human rights, no matter how long ministers procrastinate overreform of the law.

“Parliament is on the job”: the courts and reform proposals

The previous section established how a mechanistic conception of s. 4 of the HRA, as nomore than a tool for identifying infringements of rights, can transform requests for multipledeclarations of incompatibility into a threat to the separation of powers. This, however, isonly one example of the reluctance of courts to be drawn into “democratic dialogue” in therealm of prisoner disenfranchisement. The courts hearing these cases also declined to assessthe compatibility of the Labour government’s reform proposals with Article 3 of Protocol 1.Beyond general criticism of the pace of reform, such as Gillen J finding “little evidence ofa determination to prioritise appropriately the task that was defined by the Hirst decision”,127

the domestic courts hearing prisoner disenfranchisement since Hirst have largely relied onthese proposals to counter the claims of individual prisoners. In spite of the secondconsultation document’s recognition that “ultimately Parliament must debate and decide onthe extent of the franchise”,128 the government’s representatives in Chester129 (and, prior to


121 T. Hickman, “Constitutional dialogue, constitutional theories and the Human Rights Act 1998” (2005) PL 306,p. 309.

122 On the broader issue of the readiness of some courts, practitioners and commentators to identifyconstitutional difficulties with the role of the courts under the HRA, see Baroness Hale, speech to the SalfordHuman Rights Conference 2010, 4 June 2010, p. 13, available at www.supremecourt.gov.uk/docs/speech_100604.pdf.

123 Article 35(1) ECHR.124 Burden v United Kingdom (2008) 47 EHRR 38, para. 43.125 Ibid. para. 41.126 C Gearty, “Revisiting section 3(1) of the Human Rights Act” (2003) 119 LQR 551, p. 552.127 Toner and Walsh [2007] NIQB 18, para. 9(ii).128 Consultation Paper CP6/09, Second Stage Consultation, n. 5 above, p. 21.129 See Chester [2009] EWHC 2923 (Admin), para. 14.

the second consultation, in Toner and Walsh)130 emphasised that the claimant prisoners wouldnot be enfranchised under proposals which would only extend the vote to individualsimprisoned for short periods.131 In Toner and Walsh, where the claimants were convicted ofarmed robbery and burglary respectively, Gillen J asserted that he was “singularlyunconvinced that the applicants . . . will ever be able to lay claim to a right to vote”.132

In contrast to this willingness to consider the proposals where they supported thegovernment’s case, in Chester the High Court refused to address the inadequacies of thereform proposals, on the basis of the constitutional convention that the courts would notordinarily comment on proposals before Parliament.133 This convention operates alongsideArticle 9 of the Bill of Rights 1689, which provides that “the freedom of speech anddebates or proceedings in Parlyament ought not to be impeached or questioned in any courtor place out of Parlyament”. Several judges have justified the convention as upholding goodrelations between the courts and Parliament.134 In ex parte Smedley,135 Sir John DonaldsonMR followed his famous statement that “it is a constitutional convention of the highestimportance that the legislature and the judicature are separate and independent of oneanother”136 by declaring that one facet of convention prevented the courts from discussingproposals which were before Parliament:

[I]t would clearly be a breach of the constitutional conventions for this court, orany court, to express a view, let alone take any action, concerning the decision tolay this draft Order in Council before Parliament or concerning the wisdom orotherwise of Parliament approving that draft.137

Emphasising the importance of this convention in maintaining the separation ofpowers,138 Burton J concluded that the proposed reform “plainly involves a balancing actand, assuming that not all convicted prisoners are to be enfranchised, would involve difficultquestions as to which side of the line disenfranchisement would fall”.139 He considered thatthis balancing act was a task for Parliament. On this basis he asserted:

[T]hat any . . . relief which is intended to interfere with the process by which newlegislation resulting from the consultation process is now put before and debatedby Parliament, is inappropriate and is not to be granted.140

This conclusion stretches the rule protecting proceedings in Parliament to protectconsultation documents produced by the government, and not by Parliament, from judicialcomment simply on the basis that they may, in the future, form the basis of legislation, andstands in contrast to a long history of the judiciary commenting upon or agitating on behalfof reform proposals. For example, as the Constitutional Reform Bill was introduced into

130 See Toner and Walsh [2007] NIQB 18, para. 8.131 Consultation Paper CP6/09, Second Stage Consultation, n. 5 above, p. 24.132 Ibid. para. 9(iv).133 See Chester [2009] EWHC 2923 (Admin), para. 48.134 Sedley J, as he then was, once described the convention as providing for “a mutuality of respect between two

constitutional sovereignties”: R v Parliamentary Commissioner for Standards ex parte Al Fayed [1998] 1 WLR 669,p. 670. See also Office of Government Commerce v Information Commissioner [2008] EWHC 774 (Admin), para. 46,per Stanley Burnton J.

135 R v HM Treasury ex parte Smedley [1985] QB 657.136 Ibid. p. 666.137 Ibid. In deciding ex parte Smedley the Court of Appeal did proceed to consider whether the draft Order in

Council in question (concerning an undertaking regarding payments to the then European Community) wouldbe ultra vires the European Communities Act 1972.

138 See Chester [2009] EWHC 2923 (Admin), para. 48.139 Ibid. para. 66.140 Ibid. para. 52.


Parliament, senior judges actively criticised some of its proposals.141 Even more stridentjudicial opposition was mounted to the ouster clause contained within the Asylum andImmigration (Treatment of Claimants, etc.) Bill 2003.142 Although these examples involveextra-judicial activities,143 Burton J’s reading of the convention would prevent judges fromcommenting on the compatibility with the ECHR of any law reform proposals which mightform the basis of future legislation.

Burton J buttressed this broad interpretation of the convention against interfering withproceedings before Parliament with a selective reading of decisions such as CountrysideAlliance. In this case, Lord Bingham, rejecting the Countryside Alliance’s attempt tochallenge the ban on fox hunting, asserted that:

The democratic process is liable to be subverted if, on a question of moral andpolitical judgment, opponents of the Act achieve through the courts what theycould not achieve in Parliament.144

Burton J accepted that, on the basis that prisoner disenfranchisement and fox huntingwere both “matters of sensitive social policy”,145 an analogy could be drawn between thesecases. He therefore justified his refusal to engage in a “democratic dialogue” regarding thereform process on the basis that it accorded with the duty of the courts not to subvert thedemocratic process. However, this analogy glosses over the fact that prisonerenfranchisement, in contrast to fox hunting, is not an issue which has been subject to the“recently expressed views of the democratically elected legislature”.146 The Representationof the People Act 1983 merely consolidated earlier legislation and later enactments such asthe Representation of the People Act 2000 dealt with issues which were tangential to thevoting rights of convicted prisoners.147 Moreover, Countryside Alliance involved no clearinfringement of any right, with Strasbourg ultimately rejecting claims that the ban on foxhunting infringed Article 8.148 By contrast, the courts have consistently affirmed theconstitutional importance of the right to vote in the United Kingdom.149 In her speech inCountryside Alliance, Baroness Hale considered that, where an identified right has beeninfringed, the courts cannot abdicate their role in favour of action by Parliament:

When we can make a good prediction of how Strasbourg would decide thematter, we cannot avoid doing so on the basis that it is a matter for Parliament.Strasbourg will be largely indifferent to which branch of government wasresponsible for the state of the domestic law.150

This rallying cry in favour of judicial action applies equally to the above discussion ofthe HRA’s re-interpretive power. But if Burton J had reason to be wary of re-interpreting


141 See Lord Windlesham, “The Constitutional Reform Act 2005: the politics of constitutional reform” (2006)PL 35, p. 39.

142 See J McGarry, “Parliamentary sovereignty, judges and the Asylum and Immigration (Treatment of Claimants,etc.) Bill” (2005) 26 Liverpool LR 1, p. 9.

143 For an acknowledgment for the scope of advisory declarations as to the requirements of the law in judicialdecisions, see R (on the application of the Campaign for Nuclear Disarmament) v Prime Minister and others [2002]EWHC 2777, para. 15, per Simon Brown LJ.

144 R (on the application of the Countryside Alliance and others) v Attorney General [2007] UKHL 52, para. 45.145 Chester [2009] EWHC 2923 (Admin), para. 51.146 Countryside Alliance [2007] UKHL 52, para. 124, per Baroness Hale.147 See R Jago and J Marriot, “Citizenship or civic death? Extending the franchise to convicted prisoners” (2007)

5 Web JCLI.148 See Countryside Alliance v United Kingdom (2010) 50 EHRR SE6, para. 46.149 See Watkins v Secretary of State for the Home Department [2006] UKHL 17, para. 26, per Lord Bingham.150 Countryside Alliance [2007] UKHL 52, para. 125.

72

s. 3 of the Representation of the People Act 1983 in Chester, he should at least have assessedwhether the government’s long-delayed reform proposals would have infringed the right tovote, particularly with regard to the proposals to continue the disenfranchisement of “post-tariff lifers”, such as the claimant. Instead, Burton J withdrew from any putativeconstitutional dialogue. He chose, in the words of Tom Hickman, neither to “counteractprotectively” against the infringement, nor to “interact productively” with the government’sproposals.151 In the HRA era, in which the United Kingdom’s courts have a role alongsideParliament in addressing breaches of the ECHR, the courts need to develop theconstitutional convention protecting parliamentary proceedings in a manner which permitsjudicial comment upon the executive’s reform proposals before they come beforeParliament.152 Such a development would accord with the rule that in areas of “highconstitutional importance”153 the executive does not enjoy a wide discretionary area ofjudgment. As for Burton J’s arguments against this course on the basis of the separation ofpowers, Parliament ultimately has the ability to depart from the recommendations of thecourts regarding such reform proposals if it chooses to do so. In doing so, however, itwould have to “squarely confront” the human rights concerns at issue.154

Conclusion: separation of powers or splendid isolation?

The prisoner enfranchisement cases exemplify the ambiguity which has resulted from thedomestic courts’ failure to develop “a clear and stable conception of the prisoner’s legalstatus”.155 Governments have been able to manipulate the continuing uncertainty of manymembers of the judiciary regarding the legal status of prisoners, even in the HRA era. Thedomestic cases examined in this article, seem to bear out Karl Llewellyn’s injunction not tounderestimate the potential for first instance courts to tackle cases differently from theapproach adopted by the highest court,156 at least where s. 2 of the HRA is at issue. Evenas appellate courts adopt ever more nuanced approaches to the issue of following Strasbourgjurisprudence, many first instance judges remain spellbound by the clarity and simplicity ofthe “mirror” principle expounded by Lord Bingham in Ullah.157 Such reluctance to followall but the most obviously “clear and constant”158 Strasbourg jurisprudence harkens back toan earlier era of jurisprudence, when judges accepted that “decisions to be made as to thepublic interest are not such as courts are fitted or equipped to make”.159

Furthermore, these cases emphasise the weaknesses in the system of remediesestablished by the HRA. Aileen Kavanagh rejects analyses of the operation of the HRAwhich identify “highly polarised” preferences for s. 3 or s. 4 amongst the judiciary. Instead,she asserts that judges and academics “will assess the appropriateness of the judicial choicebetween section 3 and section 4 in light of the facts and the context of the individualcase”.160 Her conclusion, however, does not allow for the possibility that, despite theexistence of a breach, the courts will use their discretion to exercise neither of these


151 Hickman, “Constitutional dialogue”, n. 121 above.152 Such judicial activity could replace, for matters within the scope of the ECHR, the moribund advisory role of

the Judicial Committee of the Privy Council under the Judicial Committee Act 1833, s. 4.153 Kebilene [2000] 2 AC 326, p. 381, per Lord Hope.154 See R v Secretary of State for the Home Department ex parte Simms [1999] 3 All ER 400, p. 412, per Lord Steyn.155 L Lazarus, “Conceptions of liberty deprivation” (2006) 69 MLR 738, p. 769.156 K Llewellyn, The Bramble Bush (New York: Oceana 1951), p. 90.157 Ullah [2004] UKHL 26.158 Alconbury [2001] UKHL 23, para. 26.159 Gouriet v Union of Post Office Workers [1978] AC 435, p. 482, per Lord Wilberforce.160 Kavanagh, Constitutional Review, n. 107 above, pp. 123–4.

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choices. The case of Chester evidences the potential powerlessness of the judiciary after afirst declaration of incompatibility has been issued in instances where it is subsequentlyignored by ministers on the basis of political expediency.161

The failure of the HRA’s system of remedies in these cases was compounded by thereluctance of the courts to consider the limitations of the reform proposals in light of theGrand Chamber’s advice in Hirst. This reluctance underlines the danger in overstating thedegree to which the United Kingdom’s constitutional law has entered an era of“interaction” and indeed “interdependence” between the three branches of government.162

As Rodney Austin asserts, the courts are not a monolithic institution and “the newconstitutionalism is not universally embraced by the judiciary”.163 Judges like Burton Jappear happy to leave the role of assessing legislative proposals to Parliament’s JCHR, withits “keen eyes open for any interference with human rights”.164 Indeed, in the manysituations where ministers respond in a timely and appropriate manner to the JCHR’s often“quasi-judicial” advice,165 there is little need for judicial involvement in the process of lawreform. Nonetheless, when an issue proves to be “legally straightforward, but politicallydifficult”,166 governments are adept at sidelining the criticisms of parliamentarycommittees. In such circumstances, where an issue is as important to democracy in theUnited Kingdom as prisoner enfranchisement, judicial decisions which remain aloof fromthe controversy draw less upon respect for the separation of powers, than upon a desire forsplendid isolation from certain constitutional disputes.167


161 See T Campbell, “Incorporation through interpretation” in T Campbell, K Ewing and A Tomkins (eds),Sceptical Essays on Human Rights (Oxford: OUP 2001), pp. 79, 81–2.

162 Kavanagh, Constitutional Review, n. 107 above, p. 406.163 R Austin, “The new constitutionalism, terrorism and torture” (2007) 60 CLP 79, p. 82.164 Chester [2009] EWHC 2923 (Admin), para. 49.165 F Klug and H Wildbore, “Breaking new ground: the Joint Committee on Human Rights and the role of

Parliament in human rights compliance” (2007) EHRLR 231, p. 243.166 JCHR, 31st Report, n. 48 above, para. 62. In such circumstances Francesca Klug and Helen Wildbore assert

that “[i]t is not that the advice of the JCHR is held in less esteem than that of [other] scrutiny committees,but that Ministers are aware of the rather more discretionary and controversial nature – and values-base – ofmany human rights assessments”: Klug and Wildbore, “Breaking new ground”, n. 165 above, p. 240.

167 Subsequent to the completion of this article, the Court of Appeal heard Peter Chester’s appeal from BurtonJ’s decision (R (Chester) v Secretary of State for Justice [2010] EWCA Civ 1439). Again, the court refused to useits powers under the HRA to address prisoner disenfranchisement. It upheld the High Court’s decision, withLaws LJ asserting, at para. 35, that reform of the voting ban on prisoners “is a political responsibility, and thatis where it should remain”.

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Compensating defrauded shareholders ininsolvency: is parity the answer?

BLANCA MAMUTSE*

University of Surrey

NILQ 62(1): 75–98

Abstract

This paper studies recent developments in Australian and US law permitting compensation for defraudedinvestors. For insolvent companies, these developments have drawn attention to the possibility of investorclaims being satisfied on parity with the claims of ordinary unsecured creditors. This paper proposes thatsuch a shift may be justified on the basis of a modern perspective of the principles underpinning corporatelaw. However, account must also be taken of the more practical implications which may hinder a widespreadacceptance of parity.

Introduction

Anotable development in the field of investor protection law over the past few years hasbeen the extension of the concept of rateable (or pari passu) distribution within the

class of ordinary unsecured creditors to accommodate the interests of defraudedshareholders.1 This is due to the phenomenon of shareholder claims, defined as claims fordamages against a company by a subscriber for or purchaser of its shares, where theclaimant relies upon misleading or deceptive conduct of the company, or other wrongfulacts or omissions on its part as being causative of his or her loss.2 At first glance, it wouldseem that such an approach is contrary to the rule that debts owed to a member of acompany in his or her capacity as such (qua member) may not be satisfied before the claimsof other creditors have been met.3 This enforces the principle that:

. . . the rights of members as members come last, i.e. rights founded on thestatutory contract are, as the price of limited liability, subordinated to the rights

* Lecturer in Law, University of Surrey, UK. I am grateful to my colleague Alison Clarke for her insightfulcomments on an earlier draft of this paper. A condensed version of this paper was presented at the Societyof Legal Scholars’ annual conference in September 2011: I am indebted to the participants of the subjectsession for their helpful suggestions. I take responsibility for any errors.

1 See landmark decision of Australia’s highest court in Sons of Gwalia Ltd v Margaretic [2007] HCA 1; andchanges brought about in US by Sarbanes–Oxley Act – both discussed below. The Gwalia judgment has ledAustralian Federal Government to introduce new legislation, also discussed below.

2 Sons of Gwalia [2007] HCA 1, para. 34.3 See, for example, s. 74(2)(f) of the UK Insolvency Act 1986. See, however, s. 655 Companies Act 2006 – a

shareholder’s claim against the company for damages or other compensation is not barred by mere fact of hisor her ownership of (or entitlement to) shares in the company.

of creditors based on other legal causes of action. The rationale . . . is to ensurethat the rights of members as such do not compete with the rights of the generalbody of creditors.4

In English law, this signals a distinction which is made in upholding shareholder claims,between sums claimed qua member arising from the statutory contract, and claims in respectof which membership is an essential qualification for acquiring the claim but not thefoundation of the cause of action.5 On the other hand, the approaches recently adopted inthe US and in Australia drive us to review the justifications for the established rule in thelight of modern perspectives of corporate relationships. It is a matter of interest to lawyersin other jurisdictions, as the financial downturn has resulted in claims for securities lossbeing pursued against companies in foreign courts, particularly in the US.6 Thesedevelopments also provide an important insight into the intersection between theinsolvency distribution rules and market regulation. These underlying questions, and theconnection between them, are helpfully condensed in this extract from the decision of theHigh Court of Australia in the matter of Sons of Gwalia Ltd v Margaretic:

[M]odern legislation . . . has extended greatly the scope for “shareholder claims”against corporations, with consequences for ordinary creditors who may findthemselves, in an insolvency, proving in competition with members now armedwith statutory rights. Corporate regulation has become more intensive, andlegislatures have imposed on companies and their officers obligations, breach ofwhich may sound in damages, for the protection of members of the public whodeal in shares and other securities. This raises issues of legislative policy. On theone hand, extending the range of claims by shareholders is likely to be at theexpense of ordinary creditors. The spectre of insolvency stands behindcorporate regulation. Legislation that confers rights of damages uponshareholders necessarily increases the number of potential creditors in a windingup. Such an increase normally will be at the expense of those who previouslywould have shared in the available assets. On the other hand, since the need forprotection of investors often arises only in the event of insolvency, suchprotection may be illusory if the claims of those who are given the apparentbenefit of the protection are subordinated to the claims of ordinary creditors.7

The policy challenge described in this statement becomes more apparent whenconsidered against the backdrop of the established justifications for subordinatingshareholder claims in insolvency.


4 Soden v British & Commonwealth Holdings plc [1998] AC 298, per Lord Browne-Wilkinson, para. 324 (originalemphasis). The statutory contract referred to is now set out in s. 33(1) of the UK Companies Act 2006(formerly s. 14(1) of the Companies Act 1985): “The provisions of a company’s constitution bind thecompany and its members to the same extent as if there were covenants on the part of the company and ofeach member to observe those provisions.”

5 See Soden v British & Commonwealth Holdings plc [1998] AC 298, based on a construction of s. 74(2)(f) InsolvencyAct 1986.

6 See, for instance, M Herman, “Pensioners hire Cherie Blair to sue Sir Fred Goodwin and RBS”, The Times,16 March 2009; C Seib and M Waller, “Goldman Sachs case opens lawsuit floodgates on Wall Street”, TheTimes, 18 April 2010. However, the US Supreme Court’s recent decision in Morrison v National Australia BankLtd 2010 US LEXIS 5257 denying jurisdiction on the part of US courts to determine “f-cubed” cases(involving claims brought by foreign investors against foreign defendants in connection with transactions ona foreign exchange) may strongly limit the number of claims with a foreign element in future.

7 [2007] HCA 1, para. 18, per Gleeson CJ.

The basis for subordinating shareholder claims in insolvency

Historically, the subordination of shareholder claims in insolvency arose from the necessityto adapt laws to the creditors of corporations as distinct from the creditors of individualbankrupts.8 This concern was reflected in two principles: firstly, that corporate debts shouldbe paid before distributions are made amongst shareholders – a rule which has its originsin the conception of corporate assets as a trust fund for creditors.9 The second was thenotion that a shareholder is precluded from denying his or her liability to contribute to theassets of an insolvent company on the ground that the shareholder was induced to buy theshares by fraud.10 In modern insolvency law shareholders are referred to as the “cushion onwhich all other creditors rest”,11 and, accordingly, equity claims in general are subordinatedto the payment of other creditors. The justifications for subordination may be seen to befounded on the perception of this cushion, and can broadly be categorised as being basedon contract, creditor reliance and equity. Contractually, the relationship between theshareholder and the company entails that the shareholder as a member undertakes tocontribute a certain amount in satisfaction of its debts and liabilities, and it is arguablyinconsistent with this position to permit the shareholder to lay claim to any part of thoseassets while external creditors remain unpaid.12 However, where a contract to purchaseshares is induced by fraud, it is voidable13 and shareholders are not barred from pursuingtheir remedies against the company by reason of their membership.14 The reliance aspectexpresses the need, in ascribing a lower priority to the shareholder’s contractual claims ordamages award, to take account of the relative positions of shareholders and creditors. Inparticular, whereas shareholders enjoy the benefits of participation in the success orprosperity of an enterprise, creditors extend credit to an entity in (at least partial) relianceupon their perception of the equity “cushion” provided by the shareholders’ investments,and would be prejudiced by a dilution of the capital reserves available to repay them if thesewere to be applied equally to the payment of shareholders.15 In an insolvency situation,where there clearly remains no prospect of recovery from the equity cushion, the creditorsshift the focus of their reliance to the expectation of priority over equity claims when thedebtor’s estate is divided up.16 From the perspective of achieving equity, subordinationfurthermore ensures that innocent creditors do not bear the economic burden ofshareholder fraud remedies against the debtor company, which was involved in the

Compensating defrauded shareholders in insolvency: is parity the answer?

8 E S Hunt, “The trust fund theory and some substitutes for it” (1902) 12 Yale LJ 63.9 Wood v Dummer 3 Mason 309. Hunt, “The trust fund”, n. 8 above, discusses whether the trust applies to a

solvent company, or if it is limited to insolvent bodies (pp. 73–4).10 Oakes v Turquand [1861–73] All ER Rep 738.11 P Wood, Law and Practice of International Finance (London: Sweet & Maxwell 2008), pp. 5–19.12 Houldsworth v City of Glasgow Bank [1874–80] All ER 333, at 335; In re Addlestone Linoleum Co (1887) 37 Ch D

191 at 206; R Goode, Principles of Corporate Insolvency 3rd edn (London: Sweet & Maxwell, 2005), p. 199.13 Oakes v Turquand [1861–73] All ER Rep 738.14 See, for instance, UK Companies Act 2006, s. 655: “A person is not debarred from obtaining damages or other

compensation from a company by reason only of his holding or having held shares in the company or anyright to apply or subscribe for shares or to be included in the company’s register of members in respect ofshares.”

15 Observed by Ebel J in Re Geneva Steel Co (2002) 281 F3d 1173 at 1176 and 1179, a judgment in which thehistory of §510(b) of the US Bankruptcy Code is comprehensively discussed (Title 11, Chapter 11, USC). Aswill be seen below, this provision expressly subordinates claims for rescission or damages arising from thepurchase or sale of shares, to payment of secured and unsecured creditors. See also M E Sprouse, “A collisionof fairness: Sarbanes–Oxley and s. 510(b) of the Bankruptcy Code” (2005) 24–8 American Bankruptcy InstituteJournal 8. See also K B Davis, “The status of defrauded securityholders in corporate bankruptcy” (1983) 1Duke Law Journal 1, pp. 11–12.

16 Davis, “The status”, n. 15 above, pp. 19–22.

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wrongdoing and may have benefited from it.17 A party who has irrevocably adopted theliabilities of a shareholder cannot appear to claim out of the debtor company’s assets a sumnot included in the debts and liabilities, to the payment of which he or she as a shareholder,had agreed that those assets should be devoted.18 “Equity” may also be said to operate inthe sense of recognising the extinction of shareholders’ privileged status on the insolvencyof a company:

Shareholders’ ample and superior statutory rights, their voluntary abdication ofcontrol over their investment in favour of their appointees, the directors, whohave large statutory and constitutional discretions and obligations in theapplication of it, their rights of intervention, their rights to proceed against thedirectors personally as well as the company in some circumstances, theirstatutorily mandated limited liability, especially that, and their rights to participatein the bounty of any successes, sit uncomfortably with the notion that s 563Agives them equal billing, on the failure of the company, with ordinary creditors.19

Thus, an analysis of the relationship between shareholders and the company, betweenthe creditors and the company, and between creditors and shareholders leads to theconclusion that subordination of shareholder claims is justified on contractual and equitablegrounds. This is so although insolvency law in general20 and particularly the principle of prorata distribution21 do not – as a broad rule – allow claims to be favoured on the basis offactors such as their origin or relative merits, the nature of the claimant or its relationshipwith the debtor. With respect to claims for loss resulting from the sale or purchase of thedebtor company’s shares, the question arises whether a merger should be allowed betweenthe interests of unsecured creditors as debt-holders and the interests of shareholders ascontractual or tort claimants. Or, on the other hand, if a separation should be maintainedon the basis of their respective identities and the terms on which they are deemed to havecontracted with the corporate debtor. The latter approach allows some consistency to beachieved in treating shareholders as shareholders regardless of whether their entitlement ina particular case is analogous to that of creditors, and continuing to accord priority to thecreditors. The experience of the US and Australia, outlined below, shows how investorinterests may encroach on the distribution rights of creditors, either as a result of legislativedevelopments or by means of judicial construction.

Mandatory subordination in the United States and the impact of theSarbanes–Oxley Fair Funds requirement

In the United States Bankruptcy Code, the main principle governing distribution inChapter 7 liquidations as well as Chapter 11 reorganisations is that of “absolute priority”,whereby claims that are classed as being of a higher priority are entitled to payment in fullbefore the lower priority claims are met.22 The Chapter 7 and Chapter 11 procedures are


17 Davis, “The status”, n. 15 above, at p. 16.18 In re Addlestone Linoleum Co (1887) 37 Ch D 191, at 205.19 Callinan J’s dissenting judgment in Sons of Gwalia Ltd v Margaretic, n. 1 above, para. 242, referring to s. 563A

of the Australian Corporations Act 2001: “Payment of a debt owed by a company to a person in the person’scapacity as a member of the company, whether by way of dividends, profits or otherwise, is to be postponeduntil all debts owed to, or claims made by, persons otherwise than as members of the company have beensatisfied.”

20 Davis, “The status”, n. 15 above, pp. 16–18.21 Also known as the pari passu principle – see M Bridge, “Collectivity, management of estates and the pari passu

principle in winding-up” in J Armour and H Bennett (eds), Vulnerable Transactions in Corporate Insolvency(Oxford: Hart 2003), ch. 1, para. 1.2.

22 Title 11, Chapter 7, USC §726; and Title 11, Chapter 11, USC §1129(b)(2)(B)(ii).

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furthermore connected by the inclusion, among the requirements for a court to confirm aChapter 11 plan, of a stipulation that claimants shall receive under the plan an amount noless than they would receive in a Chapter 7 liquidation.23 Consequently, the enforcement ofthe priority structure set out in Chapter 7 is essential for the proper confirmation of aChapter 11 reorganisation plan.24

In terms of this priority structure, the claims of unsecured creditors are to be satisfiedbefore those of shareholders. Among the ordinary (non-preferential) unsecured creditors,payment of their claims is to be made on a pro rata basis.25 Thus, pari passu treatmentoperates within the framework of absolute priority, and is acknowledged as the “equality ofdistribution principle”.26 Of particular interest is §510(b) of the Code which provides thatclaims for the rescission of a purchase or sale of a security of the debtor company, ordamages arising from the purchase or sale thereof, or claims for reimbursement orcontribution for a sale or purchase, are subordinated to the payment of secured andunsecured claims. By this rule of mandatory subordination, shareholders are precludedfrom recovering from the company in respect of claims arising in contract or tort on paritywith unsecured creditors.27 The possibility of this form of shareholder elevation is clearlyexcluded, and the equality of distribution principle continues to apply as between thegeneral creditors.

With the introduction of the American Competitiveness and Corporate AccountabilityAct (referred to herein as the Sarbanes–Oxley Act),28 in particular its Fair Funds provision§308(a), this distribution regime has undergone a modification, as the Securities andExchange Commission (SEC) is entitled to direct that civil penalties recovered in respect ofsecurities violations be added to a disgorgement fund for the benefit of victims of suchviolations. The primary purpose of disgorgement is to deter violations of the securities lawsby depriving violators of their illegal profits.29 Thus, although disgorged funds may oftengo to compensate securities fraud victims for their losses, such compensation is a distinctlysecondary goal, and the measure of disgorgement need not be tied to the losses suffered bydefrauded investors.30 Civil penalties further the deterrent role of disgorgement by allowingthe SEC to impose a financial penalty which may amount to the gross monetary gain fromthe securities fraud.31 Consequently, neither mechanism entails the enforcement orcollection of a debt as such.

A change has come about in that, while the SEC formerly had only discretion todistribute recoveries from disgorgement to injured investors and was obliged to transmitcivil penalties to the US Treasury,32 the Fair Funds provision now permits it to add the civil


23 Title 11, Chapter 11, USC §1129(A)(7)(ii).24 D A Henry, “Subordinating subordination: WorldCom and the effect of Sarbanes–Oxley’s Fair Funds

provision on distributions in bankruptcy” (2004) 21 Bankruptcy Developments Journal 259, p. 270.25 Title 11, Chapter 7, USC §726(b).26 Z Christensen, “The Fair Funds for Investors provision of Sarbanes–Oxley: is it unfair to the creditors of a

bankrupt debtor?” (2005) University of Illinois Law Review 339, p. 347.27 Henry, “Subordinating subordination”, n. 24 above, p. 272.28 2002 Pub L No 107–204, 116 Stat. 745.29 SEC v Fischbach Corporation, 1333 F3d 170, at 175. See also The Investor’s Advocate: How the SEC protects investors,

maintains market integrity, and facilitates capital formation, United States SEC, available at www.sec.gov/about/whatwedo.shtml.

30 SEC v Fischbach Corporation, 1333 F3d 170, at 175–6.31 Securities Enforcement Remedies Act and Penny Stock Reform Act of 1990, 15 USC §78u(d)(3).32 See Official Committee of Unsecured Creditors of WorldCom Inc. v SEC (2006) 467 F3d 73, at 81–2, and 15 USC

§77t(d)(3)(A).

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penalties proceeds to the disgorged funds and distribute these monies to the victims of thefraud. It is recognised that this has made “another potentially large category of fundsavailable for compensation”.33 This enhanced power of the SEC supports the intentionunderlying the Act, to “protect investors by improving the accuracy and reliability ofcorporate disclosures made pursuant to the securities laws”34 and “crack down on fraud andwrongdoing”.35 Although the operation of the provision is not limited to companies thatare insolvent, the application of the Fair Funds term in a bankruptcy has meant that ashareholder whose claim against the debtor company falls for mandatory subordination interms of §510(b) may be eligible to receive compensation as a victim of fraud pari passu withunsecured creditors.36 In other words, the SEC’s share in the bankruptcy estate as a generalunsecured creditor may be distributed to the defrauded shareholders rather than being paidover to the US Treasury.37 In this way, the absolute priority rule is bypassed and, to theextent that the distinguishable (and in some respects opposing) interests of shareholdersand unsecured creditors are unusually aligned,38 its implications for pari passu treatmentmerit consideration.

In terms of general insolvency principles, this is clearly a departure from the establishedframework39 whereby the payment of equity debts is made after distribution to unsecuredcreditors. In light of the specific requirement of mandatory subordination of shareholderclaims under the US Bankruptcy Code, whereby even claims going to the root of theshareholders’ relationship with the debtor company40 and of a potentially tortious natureare categorised as equity claims, this development is even more striking. Furthermore, in thefield of corporate rescue law, as compared with the traditional focus of a reorganisationprocess, such as Chapter 11, on the debtor’s financial circumstances and recoveryprospects,41 Fair Funds uniquely diverts attention towards the obligation to take account ofthe needs of a particular group of creditors.

The consequences of implementing the Fair Funds provision §308(a) in bankruptcywere recognised by Rakoff J in assessing the penalty of the SEC in its case againstWorldCom Inc.42 He affirmed that, under the bankruptcy laws, the SEC’s penalty claim was


33 V Winship, “Fair Funds and the SEC’s compensation of injured investors” (2008) 60 Florida Law Review 1103,p. 1110. She argues, moreover, that since the passage of the Sarbanes–Oxley Act, penalties serve the dualpurpose of deterring securities law violations and compensating harmed investors (p. 1118).

34 Preamble to the Sarbanes–Oxley Act.35 Statement of President George W Bush on House of Representatives Action on the proposed

“Sarbanes–Oxley Act of 2002”, 25 July 2002.36 Christensen, “Fair Funds”, n. 26 above, illustrates this by example of a tort claim by the purchaser of an equity

security that arises from the debtor’s fraudulent activity. In the absence of a Fair Funds requirement and byvirtue of mandatory subordination, this claim would not achieve the same status as a general unsecured claimeven though in principle a holder of a tort claim would obtain the status of a general unsecured creditor:p. 348.

37 Ibid. pp. 353–4.38 Sprouse, “A collision”, n. 15 above, notes that this distribution may be received by the stockholder claimant

“to the direct detriment of unsecured creditors and in potential contravention of provisions of the Code,including §510(b) and the ‘absolute priority rule’”: p. 8.

39 See, generally, Wood, Law and Practice, n. 11 above, at 5-02, and in particular Title 11, Chapter 7, USC §726(a),which sets out the order of priority for claims, subject to the requirement of mandatory subordinationaccording to §510.

40 For instance, whether the purchase of shares is tainted by misrepresentation.41 A Keay and P Walton, Insolvency Law: Corporate and personal 2nd edn (Bristol: Jordans 2008), para. 1.3.42 SEC v WorldCom Inc., 273 F Supp 2d 431, United States District Court for the Southern District of New York,

affirmed on appeal: Official Committee of Unsecured Creditors of WorldCom Inc. v SEC 467 F3d 73 (2006) (USCourt of Appeals for 2nd Circuit).

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treated simply as another claim by one of many unsecured creditors.43 However, heacknowledged that while §308(a) gave the SEC an opportunity to pay any penalty itrecovered to shareholder victims rather than to the US Treasury, it could not properlypremise the size of its penalty on the basis of such disbursement. This move wouldarguably run afoul of the mandatory subordination provisions of the Code, given that therewas no suggestion in §308(a) that Congress intended to accord a greater priority toshareholders in bankruptcy than they had previously enjoyed. Rakoff J, however,considered it to be acceptable for the SEC to give its penalty recovery to shareholder victimsor take some account of shareholder loss in formulating the size and nature of its penalty.44

The approved settlement provided that the penalty recoveries would be directed todefrauded shareholders in accordance with the Fair Funds provision.

Rakoff J’s decision was upheld on appeal following objections by an official committeeof WorldCom’s unsecured creditors (the Committee) to the exercise of the district court’sdiscretion in approving the plan.45 The Committee took issue with the SEC’s distributionplan on the ground that, in the absence of sufficient funds to compensate all the victims ofWorldCom’s fraud, several groups of investors were excluded from sharing in the amountcollected from WorldCom. Among the investors excluded were those who had recovered36 per cent or more on their claims under the Chapter 11 reorganisation plan or throughthe sale of their securities, and investors who made a net profit on their combined purchaseand sales of WorldCom securities during the period in which the fraud occurred. TheCommittee further contended that the ordinary judicial test for reviewing the distributionof disgorged profits – that is whether the distribution was conducted in a “fair andreasonable” manner46 – should not apply to the review of Fair Funds plans. TheCommittee especially objected to the exclusion of creditors who had received more than36 per cent in the bankruptcy proceedings or through the sale of their WorldCom securitiesas flying “in the face of the strong public policy that puts the rights of bondholders aheadof those of shareholders”.47 With regard to the implications for the relationship betweencreditors, the appeal Court recognised, in the same manner as the district court, the tensionbetween the priority assigned to claims under the Bankruptcy Code and the Fair Fundsprovision, which empowered the SEC to distribute funds among injured investors outsidethe bankruptcy proceeding.48 The court saw no indication in the Fair Funds provision,however, that the SEC must follow the Bankruptcy Code’s claim priorities when developinga distribution plan, and it considered that in the absence of such an indication it was not itsrole to mitigate this tension.49 It found that the district court was required only to determinethat the SEC’s distribution plan fairly and reasonably distributed limited Fair Fund proceedsamong potential claimants, and it had properly exercised its discretion in approving theplan.50 In this way, a distribution outcome in the context of bankruptcy which did notaccord with the equality of distribution principle (or pari passu treatment) was rendered


43 Official Committee of Unsecured Creditors of WorldCom Inc. v SEC 467 F3d 73 (2006) (US Court of Appeals for2nd Circuit), p. 434.

44 Ibid. emphasis added. In the result, the penalty proposed and approved by the court was $750 million, 75times greater than any prior such penalty.

45 Ibid. The question whether the committee had exceeded its statutory authority as a creditors’ committee inbringing the proceedings was argued before the court, pp. 77–81. Provision governing powers of creditors’committees: Title 11, Chapter 11, USC §1103.

46 The test applied in the court a quo: SEC v WorldCom Inc., n. 42 above.47 Official Committee, n. 42 above, p. 85.48 Ibid.49 Ibid. p. 85.50 Ibid.

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acceptable by framing the issue for resolution not as whether the SEC was constrained toobserve the Bankruptcy Code’s priorities in making distributions; but rather by inquiringwhether it fell outside the scope of the SEC’s authority to make distributions that wereinconsistent with such priorities.

The actual compromise and settlement between WorldCom and the SEC was approvedby the Bankruptcy Court for the Southern District of New York.51 Gonzalez J refrainedfrom deciding whether the ultimate distribution to securities holders contemplated by thesettlement violated the absolute priority rule and mandatory subordination under the Code.In his opinion, even if this were found to be the correct legal interpretation from abankruptcy standpoint, there remained a number of legal issues to be addressed. The natureof these issues, as well as any other issues that may be raised in litigation to subordinate theclaim, was such as to furnish sufficient doubt as to the outcome of any litigation tosubordinate the claim of the securities holders. He took this uncertainty among otherfactors as providing support for the settlement, and went further to state that in consideringthe approval of a settlement the court was not required to resolve the “underlying legalissues” related to the settlement.52 In the court’s determination, the settlement fell withinthe range of reasonableness and was fair and equitable and in the best interests of thedebtors’ estates.53 As noted above, the mere fact of inconsistency with the absolute priorityrule did not influence the court against approving the settlement, and this incompatibilitydid not have a bearing on the “fairness and reasonableness” of the settlement that had beenreached – it was acknowledged as constituting no more than a legal issue and was thusseparable from the matters to be taken account of in sanctioning the settlement.

This reluctance to resolve the contradiction between approving a settlement with theSEC, whereby a victims’ restitution fund would be established from the settlementproceeds, and the likelihood that the distribution of the same monies would potentiallyallow a division contrary to §510(b) and pari passu distribution among ordinary unsecuredcreditors was echoed in Re Adelphia Communications.54 Gerber J acknowledged that thevictims’ restitution fund would be distributed largely to victims who were equity securityholders or investors of debt securities who would find themselves subordinated under§510(b) if they asserted claims in Chapter 11 cases. But he did not consider this to be asatisfactory basis for disapproving the settlement, as, firstly, these parties would not besharing in the assets of the estate but under a plan created and owned by the government;and, secondly, the uncertainty surrounding the disbursement of Fair Funds vis-à-vis theabsolute priority rule could be taken as supporting the view that settlement would beappropriate in the circumstances.55 It is strongly indicative of the very real difficulty that thecourts have faced in these matters that as with Gonzalez J’s judgment in the WorldCommatter, Gerber J took a negative element – namely the uncertainty arising fromimplementing a Fair Funds distribution in the light of the absolute priority structure – asevidence of the desirability of a settlement.

It may be seen that the legislature’s omission to reconcile the effect of the Fair Fundsrequirement with the current bankruptcy structure has been matched by the judicialdemurral highlighted above. The imperative of facilitating a settlement in the cases outlinedabove has enabled the courts to manoeuvre around the difficulty of making a choicebetween the competing objectives of eliminating fraud and preserving the established


51 In re WorldCom Inc., Case No 02 B 13533 (AJG): August 6, 2003.52 Ibid. p. 4 of judgment.53 Ibid.54 In re Adelphia Communications Corporation (2005) 327 BR 143.55 Ibid. pp. 168–71.

bankruptcy distribution scheme. Consequently, no views have emerged as to which is to beupheld or promoted over the other, and this underscores the uncertainty attendant on theconception of pari passu treatment as a matter of public policy:56 it does not anticipatesituations where having regard to the public interest might lead to the conclusion that theenforcement of equal treatment should be extended to non-creditor parties. The apparentinconsistency between §510(b) of the Code and the Fair Funds provision has been widelynoted,57 and in the absence of any statutory indication as to whether the application of theFair Funds provision should alter the established distributional priority scheme in theBankruptcy Code,58 commentators have advanced some persuasive arguments regardingwhether these dissonances should be viewed in a positive or negative light. Before thesearguments may be considered in greater detail, it is necessary to introduce the developmentsin Australian law which temporarily produced a similar outcome.

Sons of Gwalia Ltd v Margaretic in Australia: the High Court’sdecision and its consequences

Sons of Gwalia Ltd v Margaretic is a recent decision of Australia’s highest court,59 the salientfacts of which are as follows. In August 2004, Mr Margaretic (M) bought 20,000 fully paidordinary shares in the capital of Sons of Gwalia Ltd (Gwalia). The company was listed onthe Australia Stock Exchange and it was from this market that M made his purchase. A fewdays after M was entered on the register of the company’s members, administrators wereappointed to distribute the assets of the company as in a winding-up.60 Upon theappointment of the administrators, the Gwalia shares bought by M became completelyworthless. M claimed compensation from Gwalia, alleging a breach of the securities laws.The administrators of Gwalia sought to prevent him from proving his claim in the deed ofcompany arrangement as a creditor, rather than a member. Under s. 563A of the AustraliaCorporations Act 2001:

Payment of a debt owed by a company to a person in the person’s capacity as amember of the company, whether by way of dividends, profits or otherwise, isto be postponed until all debts owed to, or claims made by, persons otherwisethan as members of the company have been satisfied.61

Compensating defrauded shareholders in insolvency: is parity the answer? 83

56 A connection made in the House of Lords’ judgment in British Eagle International Airlines v Compagnie NationaleAir France [1975] 1 WLR 758 (HL) in refusing to uphold an airline netting arrangement on British Eagle’sinsolvency. See, however, more recent authorities declining to give effect to an independent (i.e. non-statutory)notion of public policy in relation to the rule: Perpetual Trustee Co. Ltd v BNY Corporate Trustee Services Ltd [2009]EWCA Civ 1160 (England and Wales Court of Appeal); International Air Transport Association v Ansett AustraliaHoldings Ltd [2008] HCA 3 (High Court of Australia).

57 Christensen, “Fair Funds”, n. 26 above; Sprouse, “A collision”, n. 15 above; and Henry, “Subordinatingsubordination”, n. 24 above. For a discussion from an international perspective, see J Sarra, “Fromsubordination to parity: an international comparison of equity securities law claims in insolvency proceedings”(2007) 16 International Insolvency Review 181.

58 Christensen, “Fair Funds”, n. 26 above, pp. 369–75.59 Sons of Gwalia Ltd v Margaretic [2007] HCA 1. Due to the constraints of space, the procedural history of the

litigation is not set out in this paper. For a helpful summary, combined with a detailed analysis of the HighCourt judgment, see A Hargovan and J Harris, “The shifting balance of shareholders’ interests in insolvency:evolution or revolution?” (2007) 31 Melbourne University Law Review 591.

60 Under s. 463A(1) of the Corporations Act 2001.61 Although the matter was argued on the basis that the issue for decision turned on the proper construction of

s. 563A, this was reinforced by cl. 4(2)(d) of the deed of company arrangement entered into by Gwalia: “Forthe avoidance of doubt, payment of any debts or liabilities owed by the Company to Members in theMembers’ capacity as a member of the Company, whether by way of dividends, profits or otherwise are, tothe extent contemplated by Section 563A of the [Corporations Act 2001] and the general law, to be postponeduntil all debts owed to, or claims made by, Creditors have been satisfied.”

The questions for determination were therefore whether M’s claim was a provable debt,and if so whether it ranked for payment with non-shareholder creditors, or was postponedto the satisfaction of their claims. Its ranking with non-shareholder creditors would dependon whether M’s claim fell within the s. 563A subordination of debts owed to a member asa member. Thus, although there is no statutory provision equivalent to §510(b) of the USBankruptcy Code prescribing mandatory subordination of the sort of claim brought by M,attention focused on the nature of the debts which could be considered as owing to aperson qua member under s. 563A.

Two important factors were noted that had a bearing on this case. The first was thehistorical significance of s. 563A, which could be traced back to a time when the separatelegal personality of a company had not been fully recognised, and the distinction betweencorporations and partnerships was less marked. It was an established rule of partnershiplaw that a partner in a bankrupt firm could not prove in competition with debts of outsidecreditors upon a dissolution, as this would permit him or her to diminish partnership assetsto the prejudice of the firm’s creditors, who were also his or her own creditors. This rulenow formed part of the conception of a company’s existence as an entity separate from itsmembers.62 Another influential consideration, relevant to the raising and maintenance ofcapital, was the established principle that the creditors of a company which is being woundup have a right to look to the paid-up capital as the fund out of which their debts are to bedischarged.63 This common law principle had its origins in the nineteenth century,64 andhad been given statutory effect in successive Companies Acts. These factors provided thebackground to the operation of s. 563A and demonstrated the wider implications of thedecision, beyond the resolution of this matter.

The majority of the High Court concluded that M’s claim was not a debt owed to himin his “capacity as a member” of Gwalia, whether by way of dividends, profits or otherwise.Accordingly, the claim was not to be postponed by s. 563A of the Corporations Act 2001to claims made by “persons otherwise than as members of the company”. In determiningwhether the type of claim brought by M fell to be subordinated under s. 563A, analysiscentred on the interpretation of the phrase “in the person’s capacity as a member of thecompany”. The provision itself did not manifest any clear legislative policy, as comparedwith the mandatory subordination provision §510(b) of the US Bankruptcy Code.However, it was clear to the court that it did not embody a general policy that “memberscome last” in an insolvency:

On the contrary, by distinguishing between debts owed to a member in thecapacity as a member and debts owed to a member otherwise than in such acapacity [s. 563A] rejects such a general policy.65

The criteria for subordination were thus based on the character of the debt rather thanthe identity of the claimant. In this case, the claim made by M was not founded on any rightshe obtained or obligations incurred by virtue of his membership of Gwalia. M did not seekto recover any paid-up capital or to avoid any liability to contribute to the company’s capital.His membership of the company was not definitive of the capacity in which he made his


62 Sons of Gwalia Ltd v Margaretic [2007] HCA 1, paras 3–4.63 Gleeson CJ expressed doubts regarding the modern significance of this notion: “Statutory manifestations of

that principle have been modified over the years, and it may be doubted that it reflects the reality of moderncommercial conditions, where assets and liabilities usually are more significant for creditors than paid-upcapital. As Lord Browne-Wilkinson said in Soden v British & Commonwealth Holdings plc [1998] 2 LRC 225, at232, it is “wholly irrelevant to the position of a member who has acquired fully paid shares on the market”:para. 5.

64 Trevor v Whitworth (1887) 12 App Cas 409.65 Sons of Gwalia Ltd v Margaretic [2007] HCA 1, para. 19. See also para. 119.

claim, and the obligation which he sought to enforce was not an obligation which theCorporations Act created in favour of a company’s members. The obligations arose byvirtue of Gwalia’s conduct in relation to the statutory duties alleged to have been breached– in particular the prohibition against engaging in misleading or deceptive conduct – ratherthan from a legislative prescription of the rights and duties of company members. Gwalia’scontravention of “statutory norms of behaviour”66 rendered it liable to provide damages orother relief at the suit of any person who had suffered, or was likely to suffer, loss anddamage as a result of the contravention. Accordingly, s. 563A did not apply to M’s claim, asit was not a debt owed to him in his capacity as a member of Gwalia.

Callinan J dissented from this construction of s. 563A. He considered that the scope,objects and history of the Corporations Act 2001, the language of s. 563A and thecontext in which the provision appeared, the relevant case law and the desirability ofmaintaining coherence and fairness within the law, all pointed towards the constructionthat s. 563A precluded the treatment of M as a creditor on parity with other unsecuredcreditors. He drew attention to the conformity of this result with the typicalshareholder/creditor relationship:

. . . up to the point of insolvency, liquidation or administration of a company, itsmembers enjoy superior opportunities, rights and advantages to creditors, yet thelatter are no less likely to be disadvantaged by deceptive conduct of a companylying in a failure to comply with the continuous disclosure rules. There can be nodoubt that the financial capacity of a company to satisfy its obligations to all ofthose who deal with or rely on it, is a matter of continuing interest and concernto them.67

He noted that parity would also distort inter-shareholder relationships, given that allshareholders of Gwalia had been equally wronged and induced by the company to hold onto their shares. Recent purchasers such as M would gain a large advantage over other, equallywronged, longer-term members if their claims were accorded the status of non-membership debts. He thus concluded that M’s claim should be postponed to thesatisfaction of all non-member creditor debts.

It may be seen how defrauded shareholders in the US and Australia respectively foundthemselves in similar positions; as a result of the Fair Funds legislation in one jurisdiction andof judicial construction in the other. Concern arose in Australia over the implications of theSons of Gwalia decision, which included its potential to facilitate the participation of equityholders in insolvencies and workouts; encourage litigation by shareholders or the likely use ofcompensation claims as leverage in insolvencies; and an increase in the tendency of banks torequest security when lending to a listed company.68 Notwithstanding the recommendationby the national Corporations and Markets Advisory Committee not to reverse the effects ofthe Sons of Gwalia judgment,69 the Australian government has released draft legislationoverturning the decision. The Corporations Amendment (No 2) Bill 2010 explicitly providesthat claims in relation to the buying, selling, holding or otherwise dealing in shares are to beranked equally and paid after satisfaction of all creditors’ claims. The consequences of theSons of Gwalia decision with respect to reduced access to debt finance and the increased cost


66 Sons of Gwalia Ltd v Margaretic [2007] HCA 1, para. 10.67 Ibid. para. 241. See also text accompanying n. 19 above.68 See D Loxton, “Shareholder claims in corporate failure: why is Australia ditching Gwalia?” (2010) Journal of

International Banking and Financial Law 244.69 Corporations and Markets Advisory Committee, Shareholder Claims against Insolvent Companies: Implications of the

Sons of Gwalia decision (Government of Australia, 2008). Hereafter referred to as the CAMAC Report.

and complexity of insolvent administrations, have thus been addressed.70 To this extent, thedebate in Australia regarding the use of the qua-member construction approach to conferparity on investors appears to be closed. As other jurisdictions take this direct, legislativeapproach to clarifying the position, certainty may be expected to dominate this area of law.However, this does not exclude the potential for mandatory subordination to be apparentlyundermined by another legislative instrument which is underpinned by similarly compellingpolicy reasons, as borne out by the Sarbanes–Oxley Fair Funds experience. For this reason,the consideration which follows of the arguments supporting parity focuses principally onthe US position, although it incorporates more general observations which may be relevantto the legal position in other countries.

Can parity be justified as a progressive move in insolvency distribution?

The Fair Funds provision has been recognised as a positive development on the ground thatdistributing the funds of a bankrupt estate to shareholders as tort claimants is essential toa modern system of corporate governance.71 It reflects an appropriate response to evolvingfinancial markets,72 in particular, the fact that the interests of creditors and shareholdershave changed since the era during which the theories supporting the mandatorysubordination of shareholder claims were developed.73 It is worth noting that more than aquarter of a century ago, the argument was already being advanced that the sophisticationin financial law and practice that had evolved since the inception of the subordinationdoctrine severely undermined the policy basis for protecting the creditors.74 Shareholderswere seen as constituting a more broadly dispersed group and no longer just a minorassembly of entrepreneurs and local investors, while creditor groupings had yielded to thedominance of financial institutions in place of comparatively small trade creditors andindividual debt holders.75 Both modern business creditors and modern shareholders areseen to have greater resources at their disposal to evaluate a corporation’s financial position,and a stronger understanding of the factors that affect solvency than they had whenmandatory subordination was first introduced.76 Thus, the comparative abilities of the debtand equity classes to protect themselves from fraud and to represent their interestsvigorously in a bankruptcy proceeding may be taken to have changed.77 On this view, thereis no conflict between the absolute priority rule and the operation of the Fair Fundsprovision in a bankruptcy. Not only is the result entirely in accord with the reality of thecircumstances of creditors and shareholders in current times, it is argued that it also


70 See Explanatory Note to the Corporations Amendment (No 2) Bill 2010, paras 2.6–12.71 Henry, “Subordinating subordination”, n. 24 above, at p. 262.72 Ibid.73 Ibid. p. 284. See Duffy’s discussion of the core issues in Sons of Gwalia from the perspective of the

“stakeholder” and “nexus of contracts” theories of the corporation: M Duffy, “After Sons of Gwalia – someperspectives on the position of shareholders and creditors and the question of law reform”, (2008) 22Australian Journal of Corporate Law 161.

74 Davis, “The status”, n. 15 above, pp. 28–9.75 Ibid; Henry, “Subordinating subordination”, n. 24 above, at p. 284.76 Henry, “Subordinating subordination”, n. 24 above, at p. 284.77 Ibid; Davis, “The status”, n. 15 above, p. 29, in fact argued that the shareholders had limited means to acquaint

themselves with the debtor’s financial situation. Likewise, the CAMAC Report, n. 69 above, notes that inpractice, existing shareholders may have little or no real day-to-day capacity to monitor or control corporatedisclosures or other corporate conduct and may be as misled as new investors by corporate misconduct(para. 3.4).

represents an acceptance that blanket shareholder subordination is a rigid approach whichcan yield unfair outcomes.78

Moving beyond the legal position in the US, there are further broad justifications whichmay be identified in favour of elevating shareholder claims. The first of these is that theinherent dynamism of public policy must extend to a rule such as pari passu. That is to say,since pari passu has been upheld and applied as being based on public policy,79 and publicpolicy is based on the current needs of the community,80 in principle the concept ofrateable treatment should be equally malleable to accommodate the effect of the changes inthe relationship between shareholders and creditors in modern times. Indeed, it wasacknowledged, among the arguments for non-subordination preceding the recent AustralianCorporations Amendment Bill, that the positions of shareholders and creditors in aninsolvency are not wholly dissimilar:

[I]n some companies, such as large listed companies, ordinary shareholders, eveninstitutional shareholders, have limited practical ability to direct the company andin reality may have no greater power than creditors. They therefore need acomparable level of protection in an insolvency.81

Since the law develops by perpetually drawing new values and solutions from the life ofthe community82 – a feat attained partly through the development of new law, and partlythrough standards and principles which are implicit in particular branches of the law suchas “reasonableness” and “public policy”83 – a change of this type is not beyond the realmof possibility. Moreover, it has been argued that some of a company’s securities violationsmay have occurred with the collusion of some of its creditors (albeit that their actions maynot attract specific civil or criminal liability);84 and since trade creditors dealing with such acompany will typically have their invoices paid until the company is on the verge ofinsolvency, they are not invariably in the position of parties who have lost everything to adebtor.85 In the light of all these factors, it would seem inconsistent with the developmentof public policy that mandatory subordination should override the possibility of anypayment to defrauded shareholders on the same priority with the unsecured creditors of acompany. It is arguably desirable that the understanding of “equality of distribution” shouldevolve in tandem with this re-balancing of the relative positions of creditors andshareholders. Indeed, remaining faithful to the theoretical conception of the risks assumedby either grouping would achieve the result that the law pulls in a different direction fromthe realities of commerce and, thus, fails to meet the broad goal of public policy to servethe current needs of the community.

Another factor which should enable the acceptance of pari passu treatment fordefrauded shareholders vis-à-vis unsecured creditors is the notion that companies are social


78 A Hargovan and J Harris, “Sons of Gwalia and statutory debt subordination: an appraisal of the NorthAmerican experience” (2007) 20 Australian Journal of Corporate Law 265.

79 See British Eagle case, n. 56 above; and Attorney General v McMillan & Lockwood [1991] 1 NZLR 53. See,however, more recent comments narrowing the scope of this public policy aspect of the rule in PerpetualTrustee and IATA v Ansett, both cited in full at n. 56 above.

80 P H Winfield, “Public policy in the English common law” (1928) 42 Harvard Law Review 76–102, p. 92.81 CAMAC Report, n. 69 above, para 3.3.1. See also Explanatory Note, n. 70 above, para. 2.23.82 G Paton, Jurisprudence (Oxford: Clarendon 1972), p. 199.83 Ibid.84 K Cordry, “Categorical subordination: still kicking?” (2006) 24(10) American Bankruptcy Institute Journal 8, p. 51.85 Ibid.

enterprises86 – their existence is required to produce consequences beneficial to society87

and their activities should accordingly be consonant with the public interest.88 This includesmaking profits for the shareholders, which becomes a mechanism for promoting the publicinterest, and not an end in itself.89 The classification of companies as social enterprisesentitles the state to intervene in order to safeguard the public interest and ensurecompliance with publicly acceptable ethical standards while they are going concerns.90 Onthis basis, it is submitted that this entitlement should reasonably continue into theinsolvency of a company and would be even more pertinent to a reorganisation processwhich offers the prospect of survival of a company. The public interest receives protectionthrough the deterrence of fraud or dishonest behaviour on the part of companies, thepreservation of financial integrity and commercial morality in the market, and theencouragement of investment or enterprise within society. These concerns were prominentin the debates leading to the enactment of the Sarbanes–Oxley Act91 and, from anenforcement perspective in particular, actions such as disgorgement and restitution toinjured investors promote economic and social policies, including investor confidence in thefairness and transparency of securities markets and the deterrence of future violations.92 Itis similarly noted by the Australian legislature that “aggrieved shareholder claims” can actas a form of private enforcement and help promote the integrity of corporate conduct, tothe benefit of lenders and the market generally, and not only shareholders.93 This resonateswith the view that from a social-enterprise perspective financial impropriety on the part ofmanagers and inadequate methods of accountability and control are no more to betolerated in the corporate sphere than they are within the organs of government.94 Thus,to accept that insolvency law affects community interests – and is bound to recognise andsafeguard such interests95 – is to extend the social-enterprise/public-interest aspect of acompany’s existence into its demise. A virtuous circle is identifiable between the efficiency


86 J E Parkinson, Corporate Power and Responsibility: Issues in the theory of company law (Oxford: Clarendon 1993),p. 23. See also Armour et al.’s submission that the goal of corporate law is to advance overall social welfare:J Armour, H Hansmann and R Kraakman, “What is corporate law?” in R Kraakman, J Armour, P Davies etal., The Anatomy of Corporate Law: A comparative and functional approach 2nd edn (Oxford: OUP 2009), ch. 1, p. 28.

87 Parkinson, Corporate Power, n. 86 above, p. 33.88 Parkinson, Corporate Power, n. 86 above, pp.23–6.89 Ibid. p. 24.90 Ibid. In similar vein, Cheffins finds support for the proposition that lawmakers should take action when

markets threaten to undermine key community ideals: B Cheffins, Company Law: Theory, structure and operation(Oxford: Clarendon 1997), p. 153.

91 148 Cong Rec H4478-85 (“Corporate reform needed” – House of Representatives); 148 Cong Rec H5462-80(conference report on proposed legislation, House of Representatives); and 148 Cong Rec S7350-65(conference report on proposed legislation, Senate).

92 SEC, Report Pursuant to Section 308(c) of the Sarbanes–Oxley Act of 2002, available fromwww.sec.gov/news/studies/sox308creport.pdf , pp. 19–20.

93 See Explanatory Note, n. 70 above. This echoes the CAMAC Report’s (n. 69 above) position: “Claims byaggrieved shareholders can serve as a market-based deterrence, enforcement and recovery mechanism insupport of required standards of corporate conduct” (para. 3.4).

94 Parkinson, Corporate Power, n. 86 above, p. 202. Indeed, Attenborough notes that the very largest corporationshave greater economic power than many nation states: D Attenborough, “How directors should act whenowing duties to the companies’ shareholders: why we need to stop applying Greenhalgh” (2009) InternationalCompany & Commercial Law Review 339, p. 346.

95 Insolvency Law and Practice: Report of the Review Committee, Cmnd 8558 (1982), paras 198(i), 240 and 1734.

of financial markets resulting from timely and accurate disclosures,96 and a reduced risk ofinsolvency as fewer companies fail through poor management and the delayed evidence offinancial difficulty.

Insolvency law jurisprudence97 and policy98 do not deny the relevance of publicinterests, but do not answer fully the important question of the extent to which they can(or should) be accommodated in practice. This has provided fertile ground for debate, inparticular as regards the ability of social interests to impinge on creditors’ rights ofrecovery.99 However, in the operation of Sarbanes–Oxley Fair Funds provisions, there is nodirect encroachment on the assets available to unsecured creditors since the SEC recoversrestitution by way of civil penalties and disgorgement levied on a wide body of persons andpays to the injured investors out of funds that would otherwise be paid to the Treasury.100

The new position is therefore arguably defensible on the ground that it does not interferewith the equal treatment of creditors per se, as the disbursements are not being made fromfunds that they would otherwise be entitled to. In fact, in some cases, the SEC has madepayment of disgorgement or civil penalties to investors via a bankruptcy trustee “fordistribution to creditors, including investors”.101 Although this particular parity may seeminconsistent with the distribution structure enshrined in the absolute priority rule, in realitythe scope for interference with this structure is reduced by factors pertinent to theoperation of Fair Funds. These include the difficulty faced by the SEC in satisfying strictjudicial requirements for disgorgement orders;102 the power of the SEC to exercise adiscretion to either transmit its recoveries to the Treasury or use them to compensate thedefrauded investors;103 the likelihood that such distributions may be foregone in situationswhere it proves not to be cost-effective to make them;104 and the principle thatcompensation is not the same as satisfaction of the shareholders’ claims.105 The impact ofthe application of Fair Funds on the maintenance of the insolvency distribution structuremay thus not be as profound as it might appear at first glance. It is accordingly proposedthat for insolvency law to be seen to do more than pay lip-service to notions of thecommunity welfare, it should give perceptible effect to such market-related concerns asthose targeted by the Sarbanes–Oxley Act, particularly if this offers the prospect ofreducing the incidence of insolvency in those same markets. Moreover, it would show thatthe demands of commercial morality placed upon a company during its lifetime (as

96 CAMAC Report, n. 69 above, para. 2.4.3: “Financial markets are more efficient and less volatile to the extentthat companies provide timely and accurate disclosures about their real financial position and prospects.”

97 See, for instance, A Keay, “Insolvency law: a matter of public interest?” (2000) 51 NILQ 509–34; and V Finch,Corporate Insolvency Law: Perspectives and principles 2nd edn (Cambridge: CUP 2009), ch. 2.

98 Insolvency Law and Practice, n. 95 above, paras 198(i), 240 and 1734; Law Reform Commission, General InsolvencyInquiry, Report No 45 (Commonwealth of Australia, 1988), para. 33.

99 The various views have been outlined in some detail by Finch, Corporate Insolvency Law, n. 97 above.100 See SEC, Report, n. 92 above, pp. 3–5. See also Christensen, “Fair Funds”, n. 26 above, p. 371.101 SEC, Report, n. 92 above, pp. 10, 12 and 16.102 Ibid. pp. 18–19 and 23–4. A reading of the Fair Funds provision shows that it cannot operate in the absence

of a disgorgement order, to which the SEC may add civil penalties. There is a danger of a practice developingwhereby the SEC seeks token disgorgement amounts in order to facilitate the distribution of massivecorporate penalties to investors: B Black, “Should the SEC be a collection agency for defrauded investors?”(2008) 63 Business Lawyer 317, at p. 330.

103 SEC, Report, n. 92 above, pp. 5 and 10–11.104 Ibid. pp. 3–5.105 SEC v Fischbach Corporation 1333 F3d 170; and SEC, Report, n. 92 above, pp. 19–20. Winship, “Fair Funds”,

n. 33 above, points out that the losses sustained by investors often dwarf the profits made by the violators andthus recoveries only represent a fraction of the amounts lost (5–6% in the case of WorldCom), p. 1125.


evidenced by measures including the Sarbanes–Oxley Act)106 are accorded the samesignificance on its insolvency.

Focusing more narrowly on debtor/creditor and inter-creditor relationships, one mightalso contend for an acceptance of the improved position of shareholders relative tounsecured creditors on the ground that creditors generally have a number of alternativesopen to them for the purpose of protecting themselves from the consequences of adebtor’s insolvency. They are often able to engage in processes to determine the probabilityof the debtor’s default in advance; they may obtain personal guarantees or security; requireinformation which demonstrates the debtor’s continuing creditworthiness, and takeinsurance against the risk of default.107 It is noted that apart from their ability to negotiatefor contractual protections, many creditors are well-diversified, in the sense that each debtcontract only has a small impact on their financial status.108 A typical lender is ordinarilywell-situated to absorb the loss associated with the failure of a single business enterprise,whether this lender takes the form of a trade creditor with numerous customers or a bankwith a large number of corporate borrowers.109 The historical necessity for granting rigidcreditor protections as a quid pro quo for the limited liability enjoyed by shareholders istherefore distinguished from modern commercial practice, where major business creditorsrely not on the law, but on contract, credit agencies and a host of other self-help measuresto safeguard their interests.110 The reach of creditor influence is evidenced by the fact thatmuch of the concern regarding the implications of the Sons of Gwalia decision was directedtowards the effects on debt finance for companies. It was perceived that there would be areduced availability or increased cost of finance and lenders would be more likely to seeksecurity or guarantees and impose restrictive conditions on loans.111 Trade creditors wouldhave increased recourse to retention of title agreements, or factor the added risk of non-recovery in insolvency into their costs of goods or services.112 It followed, therefore, thatexplicit statutory subordination of shareholder claims would facilitate the provision ofcredit to companies and, from the standpoint of credit providers, reduce risk premiums andthe imposition of onerous terms and conditions.113

In addition, as between creditors inter se, it is evident that many of the rules ofinsolvency distribution governing their relationship are already underpinned by notions offairness. Drawing from the example of English insolvency law, in the validation of pre-insolvency dispositions, transactions which might result in certain creditors being paid infull at the expense of other creditors who will only receive a dividend may be upheld wherespecial circumstances exist making such a course desirable in the interests of the unsecuredcreditors as a body.114 Similarly, a preferential transaction brought about by proper


106 See further Cheffins, Company Law, n. 90 above, discussion on the ways in which the state will intervene toensure fairness in the treatment of company participants, effective participation in corporate affairs, theprotection of community ideals, and the preservation of morality in the market system, pp. 142–58.

107 Cheffins, Company Law, n. 90 above, pp. 501–2. A view also shared by Davis, “The status”, n. 15 above.108 Cheffins, Company Law, n. 90 above, p. 502.109 Ibid.110 Armour et al., “What is corporate law?”, n. 86 above, make this observation in advancing the argument that

corporate law is useful as a foundation and supplement to contractual protections for creditors, at p.72.111 CAMAC Report, n. 69 above, para. 2.4. See also paras 2.6–9 of Explanatory Note, n. 70 above.112 CAMAC Report, n. 69 above, para. 2.4.113 Explanatory Note, n. 70 above, para. 2.12.114 Re Gray’s Inn Construction Co. Ltd [1980] 1 WLR 711, at 717D and 718 A–C; Re J Leslie Engineers Co. Ltd (in liq)

[1976] 1 WLR 292, at 305; Denney v John Hudson & Co. Ltd [1992] BCLC 901, at 904; and Re Tain ConstructionLtd [2003] EWHC 1737, paras 14–17.

90

commercial considerations115 or a late floating charge granted to creditors involved inefforts to revive a struggling company116 have been countenanced, notwithstanding theconsequences for equal treatment. Defences based on the “ordinary course of business”,entitling creditors to retain benefits from preferential transactions, are also a feature of USand Australian insolvency law.117 If these differences among creditors may be accepted onthe grounds of fairness, strong support may be lent to a claim by injured shareholders tosimilar treatment on the grounds of procedural fairness.118 Procedural fairness relates tothe fairness of the contracting process,119 encompasses the methods which marketparticipants use to negotiate and formulate transactions, and is breached where thetransactors do not have a chance to make agreements freely and knowingly.120 Whereshareholders have purchased shares on the basis of fraudulent misrepresentations, there isa clear absence of procedural fairness. Injured investors are required to prove the fact ofthe dishonest inducement, together with their dependence thereon and consequent loss, tothe satisfaction of a court in order to be awarded damages121 – a burden conceded to be adifficult one to discharge, in the analysis following Sons of Gwalia.122 It is therefore arguablethat their entitlement to fairness (connoting similar treatment to unsecured creditors) isjudicially established in comparison to the notion of creditor reliance on capital reserves,which exists as a mere presumption of doubtful influence.123 In addition, to the extent thatthe concept of fairness is taken to encompass a moral element,124 it would seem even moreimportant that it should avail relief in the case of involuntary debt (that is, the defraudedshareholders) compared with fairness based on commercial expediency (to wit, the generalcreditors in whose favour normally voidable transactions are adjusted). Extending thisequitable treatment to accommodate the defrauded shareholders thus accords with thesame principle which enables creditors to adjust their own relationships, and would notsignificantly distort existing insolvency processes or relative creditor positions within theunsecured rank. Furthermore, it can be reconciled with an important rule of equity, namelythat, where trustees have made a fraudulent conveyance, the loss should fall on thebeneficiaries rather than on a bona fide purchaser for value.125


115 Re MC Bacon Ltd [1990] BCLC 324, at 336; Lewis v DKG Contractors [1990] BCLC 903, at 910; Re FairwayMagazines Ltd [1992] BCC 924, at 930; Wills v Corfe Joinery Ltd [1998] 2 BCLC 511, at 512.

116 Insolvency Act 1986, s. 245(2)(b); Re Matthew Ellis Ltd [1933] Ch 458.117 US Bankruptcy Code, §547(c); Corporations Act 2001 (Australia), s. 588FG(2).118 Described by S Smith, “In defence of substantive fairness” (1996) 112 Law Quarterly Review 138, p. 140; and

Cheffins, Company Law, n. 90 above, p. 143.119 Smith, “In defence”, n. 118 above.120 Cheffins, Company Law, n. 90 above; Smith, “In defence”, n. 118 above.121 Under contract and traditional tort law principles: Davis, “The status”, n. 15 above, p. 39. Reliance is

presumed, under the “fraud on the market” theory in the US – see Basic v Levinson (1988) 485 US 224. Seealso para. 3, Sch. 10A of the UK Financial Services and Markets Act 2000.

122 CAMAC Report, n. 69 above, at para. 3.2.2: obtaining a remedy through litigation as an aggrieved shareholdercan be a difficult task, as it turns on whether a shareholder can establish the necessary elements of relevantcorporate misconduct, causation, reliance and damages incurred.

123 Davis, “The status”, n. 15 above, at pp. 32–4, questions the extent to which the existence of the subordinationdoctrine influences lending decisions. The High Court of Australia in Sons of Gwalia [2007] HCA 1 alsoexpressed doubts as to whether the reliance principle “reflects the reality of modern commercial conditions,where assets and liabilities usually are more significant for creditors than paid-up capital” (para. 5).

124 D Sullivan, “Rules, fairness, and formal justice” (1975) 85 Ethics 322–31. Admittedly, however, this is unfairon the remaining shareholders: the CAMAC Report notes that when aggrieved shareholders sue or reach asettlement with the company, the people who indirectly suffer loss are the remaining shareholders, from themarket value of their shares or reduced dividends (n. 69 above, at para. 3.3.4). This problem is discussedfurther below.

125 Pilcher v Rawlins (1872) 7 Ch App 259.

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Difficulties with implementing parity

It may be seen from the foregoing that, on the basis of corporate theory and the nature ofpublic policy, there are grounds for considering that the US legislature is content with thealignment of the interests of unsecured creditors and injured investors and might notrespond to calls for it to resolve the apparent discord between the principle of mandatorysubordination and the effect of a Fair Funds distribution.126 This may be contrasted withthe swift action taken in Australia to enact an unequivocal rule. Many of the concernsvoiced relate to the manner in which the SEC or injured investors may adapt their behaviourto maximise their recoveries.

For example, fears have been expressed that the SEC may become aggressive in itspursuit of larger penalties, resulting in the decrease of assets available to general creditors,where the penalties are sought from a company involved in a bankruptcy proceeding.127

These are reinforced by indications that the SEC has welcomed the Fair Funds provision asan innovation which it can use “to return more funds to investors”.128 Black relies onfinancial fraud settlements against four corporate defendants to demonstrate how the SEC’sefforts to create Fair Funds distributions for investors have resulted in an evasion of thedisgorgement requirement and the imposition of sizeable penalties.129 Moreover, the shifttowards compensation as a goal of the SEC may have implications for the deterrenceobjective of securities law enforcement, if the SEC pursues penalties that have acompensatory effect but are inadequate for deterrence, or foregoes the collection ofpenalties in situations where they cannot be used to compensate investors.130

Mass claims by investors to recover damages may also bring about a diminution in theassets available to unsecured creditors, as noted by Callinan J in Sons of Gwalia: “It is notdifficult to imagine a situation in which claims of a large body of shareholders, perhapsmost of them, would dilute the creditors’ rights to a trickle.”131

In the context of Australian law, it was noted that class actions and litigation fundingmight encourage this form of shareholder litigation, also to the detriment of the remainingshareholders.132 Furthermore, any complications associated with such proceedings wouldbe multiplied in the event of the collapse of a corporate group.133

A matter which has received less attention, particularly in the context of the US wherethe SEC as a regulatory body is empowered to redistribute its bankruptcy recoveries toinjured investors, is the extent to which these “sub-distributions” conform to the principlesof insolvency distribution. The potential for the SEC, in the context of bankruptcyproceedings, to pursue policies which are not related to the accepted objectives ofinsolvency law134 is most starkly reflected against the backdrop of the three possible


126 Made by scholars including Christensen, “Fair Funds”, n. 26 above.127 Ibid. p. 370.128 SEC, Report, n. 92 above, p. 36. See Winship, “Fair Funds”, n. 33 above, p. 1124.129 Black, “Should the SEC?”, n. 102 above, p. 331. Namely WorldCom, Time Warner, AIG and Fannie Mae.130 Winship, “Fair Funds”, n. 33 above, at p. 1139.131 Sons of Gwalia [2007] HCA 1, para. 256.132 See CAMAC Report, n. 69 above, n. 3.3.4.133 M Wyburn, “Pooling as a response to the competing interests in corporate group collapses in Australia” (2010)

19 International Insolvency Review 65, p. 72.134 Objectives outlined by Goode, Principles, n. 12 above, pp. 2–17 et seq; Richardson and Mack note that the SEC

can establish a plan based on considerations that are not recognised under the US Bankruptcy Code:R G Richardson and J S Mack, “It isn’t what it used to be, but the SEC still protects shareholder interests”(2007) 26(3) American Bankruptcy Institute Journal 12, p. 67.

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interpretations that are associated with the mention of the pari passu principle,135 whichenforces pro rata distribution among unsecured creditors in insolvency. This “equality ofdistribution” principle has been identified in the opening pages of this paper as operatingwithin the framework of absolute priority in US law, and accordingly may be examinedwithin the setting of more general observations relating to pari passu treatment.

The broadest view of the pari passu rule is one whereby it connotes the treatment of allunsecured creditors equally and ignores any considerations pertaining to their individualcircumstances.136 This outlook is not represented in the SEC’s actions vis-à-vis Fair Fundsbecause it is empowered to set distribution criteria that are not objective in nature. Thecourts, recognising the deterrent role of enforcement mechanisms such as disgorgement,have deferred to “the experience and expertise of the SEC” in the line-drawing whichinevitably leaves out certain potential claimants.137 This line-drawing is as relevant forseeing which parties are brought into the distribution process, as well as noting who is leftout: as seen in Official Committee of Unsecured Creditors of WorldCom Inc. v SEC,138

shareholders may receive payment in priority to certain classes of creditors in the interestsof equalising their respective recoveries. This means that pre-insolvency payments tocreditors, which would not otherwise be subject to challenge, may nonetheless providegrounds for excluding them from the SEC’s distribution. Furthermore, since the Fair Fundsproceeds may be distributed among “victims of [securities] violations”139 it is possible forparties who had not acquired an interest in the debtor’s estate as shareholders, but werenonetheless injured by the violations, to enjoy priority over non-defrauded shareholders.This goes to the nature of the rights acquired before bankruptcy140 and, with respect topersonal actions, the upholding of remedies in tort over the contractual rights of creditorsand shareholders.

An alternative conception of pari passu treatment sees it as denoting no more than prorata distribution within classes.141 This is detracted from in the context of Fair Fundsinsofar as experience has shown that the SEC may choose which parties to exclude in favourof others. In terms of this second interpretation, in the normal bankruptcy hierarchy, non-preferential unsecured creditors would together occupy one class and shareholdersanother.142 By contrast, the SEC’s distribution methods permit it to select from either classcertain investors to benefit from the Fair Funds proceeds. This would be at the expense ofothers who properly belong to those classes but who had made a profit on the sale of theirsecurities during the period in which the fraud occurred or recovered more than a givenpercentage of their entitlements through the sale of their securities.143 Even though theseinvestors could have qualified as general unsecured creditors or shareholders, they may bebarred by the SEC from participation in the Fair Funds distribution for the benefit of thenon-profiting or non-recovering unsecured creditors and shareholders. The result is


135 Identified by R J Mokal and L C Ho, “The pari passu principle in English ancillary proceedings: Re HomeInsurance Company” (2005) 6 Insolvency Law and Practice 207–10, p. 208.

136 Mokal and Ho, “The pari passu principle”, n. 135 above; Bridge, “Collectivity”, n. 21 above, para. 1.2; In reSmith, Knight & Co. ex parte Ashbury (1868) LR 5 Eq 223.

137 SEC v Wang (1991) 944 F2d 80, at 88.138 Official Committee, n. 42 above.139 §308(a) Sarbanes–Oxley Act, 2002 Pub L No 107-204, 116 Stat 745.140 Goode, Principles, n. 12 above, para. 3-02.141 Mokal and Ho, “Pari passu principle”, n. 135 above.142 Ibid; Wood, Law and Practice, n. 11 above, para. 1-14.143 Distributions of this nature accepted as being proper in SEC v Wang (1991) 944 F2d 80 and in Official

Committee, n. 42 above.

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therefore of differing treatment of general creditors inter se and shareholders amongthemselves by effecting the dismantling of these recognised classes in insolvency. If weaccept that ranking in insolvency is indeed its most important feature, rather than theachievement of equal treatment,144 in the context of the sub-distributions creditors orshareholders cannot be guided by the prior knowledge that they would ordinarily have oftheir place within the distribution structure. Thus, their rank (or mere participation indistribution) is not determined with reference to negotiations conducted with the debtor exante145 and in accordance with their respective bargains, but in the light of their position atthe time of distribution and relative to one another. Insofar as account is taken of profits orrecoveries already made by the time the SEC comes to disburse Fair Funds proceeds, theranking is coloured with a moral or ethical element which pari passu has been found tolack.146 This disregards the possibility that at least some of the transactions may have beenentered into by the investors in ignorance of the fraud. Even where there is an awarenessof the fraud, it might not necessarily act as a check on pre-disgorgement transactionsbetween the debtor and investors: some may prefer to maximise the gains from the sale oftheir securities than gamble on the uncertainty of the SEC’s discretion being exercised intheir favour. Thus, rather than producing deterrent effects for irregular or dishonestactivities, this form of ranking may be counter-productive for the SEC’s pooling of funds.

The entitlement of the SEC to distribute Fair Funds proceeds according to its discretionalso sits uneasily with the third facet of pari passu treatment, namely the principle ofcollectivity.147 The collective nature of insolvency relates to the conservation of the estateto ensure orderly distribution among creditors.148 Predictably therefore, the number ofordinary unsecured creditors proving claims in the debtor’s insolvency determines the sizeof their respective returns following payment of priority obligations. Collectivityconsequently carries a certainty of at least partial recovery for a creditor, with theproportion being dependent upon the number of other parties participating in the sharingof the estate. Conversely, in the disbursement of Fair Funds, it is settled that the standardof fairness and reasonableness permits the SEC to take account of the limited fundsavailable for distribution in deciding which parties to exclude from payment under itsplan.149 Thus, the certainty of participation is absent for investors as the amount availablefor payment influences the decision on who may benefit from the Fair Funds. Thedistinction is clear: while for the purposes of collective treatment in insolvency it issufficient to be accepted as a creditor, qualifying as a victim of a securities violation doesnot assure enjoyment of a share in Fair Funds.

A gap is therefore apparent between the normal course of an insolvency distributionprocedure and the manner in which the SEC fulfils its responsibilities for distribution of theFair Funds with respect to a company which is now insolvent. The readiness of otherjurisdictions to adopt the Fair Funds model may be tempered by the fresh imbalances whichparity seems to generate. These are briefly discussed in the concluding section of this paper.


144 J Dalhuisen, Dalhuisen on Transnational and Comparative Commercial, Financial and Trade Law 3rd edn (Oxford: Hart2007), p. 959. See also Mokal and Ho, “Pari passu principle”, n. 135 above.

145 As argued by Dalhuisen, Dalhuisen, n. 144 above.146 See, for instance, Mitchell and another v Buckingham International plc & others [1983] Ch 1. “Amorality” of pari passu

also noted by Bridge, “Collectivity”, n. 21 above, para. 1.2.147 Principle outlined in more detail by Mokal and Ho, “Pari passu principle”, n. 135 above, p. 208.148 Ibid. Goode, Principles, n. 12 above, para. 1-04.149 SEC v Wang (1991) 944 F2d 80, at 87–88. This also occurred in Official Committee, n. 42 above. This is despite

the fact that the SEC can determine the size of its “estate” insofar as it can take some account of shareholderloss in formulating the size and nature of its penalty: SEC v WorldCom 273 F Supp 2d 431.

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Does parity open up new imbalances?

The difficulty of squaring the parity brought about by Fair Funds with prevailingconceptions of the notion of pari passu treatment have been highlighted in the precedingsection of this paper. Even if it could be aligned with the equality of distribution principle,there are two important respects in which it may be seen as unsettling particularshareholders and creditors.

The first, identified in literature on securities class actions, is the circularity problem.150

This occurs due to the shifting of wealth from the current shareholders of a corporation,who indirectly bear the costs of any judgment or settlement against it, to the claimantshareholders who acquired shares in the company at the material time.151 Coffee describesa more complex form of wealth transfer, affecting diversified shareholders, in these terms:

Often shareholders will belong to both the plaintiff class that sues and theresidual shareholder class that bears the cost of the litigation. This can resultbecause they purchased stock at times that are both inside and outside the classperiod, so that they are on both sides of the litigation. Thus, they are effectivelymaking wealth transfers to themselves, in effect shifting money from one pocketto the other, minus the high transaction costs of securities litigation.152

Alternatively, if the shareholders of a company are not all similarly diversified, litigationmay bring into tension the interests of the “buy and hold” (small undiversified) investorswith those of the “in and out” (larger sophisticated) traders.153 Mitchell has decried thenotion of the “innocent shareholder”, portrayed as the rationally apathetic passive investorsfrom whom wealth is transferred in this way. He argues that shareholders’ participation inthe affairs of the company ensures the integrity of capital markets and is part of themechanism by which managerial frauds are deterred.154 This may be countered with theobservation that shareholders of a public corporation usually have little or no voice in theselection of the managers or the way in which they conduct its affairs; large creditors arelikely to have much more control, especially as the company slides into insolvency.155 Onemight also add that the “shareholder participation” argument does not answer the concernsof individuals who hold shares indirectly through pension funds, unit trusts, or othercollective investments.156 They are not in a position to exert any significant influence overthe running of the company.


150 J Coffee, “Reforming the securities class action: an essay on deterrence and its implementation” (2006) 106Columbia Law Review 1534; L Mitchell. “The ‘innocent shareholder’: an essay on compensation and deterrencein securities-class actions” (2009) Wisconsin Law Review 243.

151 Coffee, “Reforming”, n. 150 above.152 Ibid. p. 1558.153 Ibid. pp. 1559–60.154 Mitchell, “Innocent shareholder”, n. 150 above, pp. 291–2.155 Davis, “The status”, n. 15 above, p. 44. Furthermore, with respect to individual shareholders, the evolution of

their role from “shareholder as owner/principal” to “shareholder as investor” with limited participation rightsis traced by Jennifer Hill: J Hill “Visions and revisions of the shareholder” (2000) 48 American Journal ofComparative Law 39.

156 A recent report on equity and bond ownership in the US found that that there had been a growth in ownershipthrough employer-sponsored retirement plans: Equity and Bond Ownership in America (Washington: InvestmentCompany Institute and the Securities Industry and Financial Markets Association 2008).

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Secondly, the debate regarding parity creates a danger of viewing all unsecured creditorsas contractual creditors, such as lenders and trade suppliers.157 Parity will also affectcreditors who have not bargained for risks on the same basis. While parity with non-shareholder tort creditors may be wholly appropriate on the basis that both types of claimare rooted in involuntary debt, in this context one must also have regard to the interests ofcreditors, such as the revenue authorities, whose relationship with the debtor company isnot derived from a negotiated acceptance of risks. This is of particular significance incountries where fiscal debts no longer enjoy preferential status, such as the UK. Insolvencylaw reforms aimed at improving the position of unsecured creditors included the abolitionof Crown preference in all insolvencies – corporate and personal.158 A study recentlycarried out by the Office of Fair Trading found that Her Majesty’s Revenue & Customs wasowed more than £50,000 in 57 per cent of administrations and on average accounted for24 per cent of unsecured debt.159 The justifications for parity may be somewhatundermined, if it results in encroachment on other claims which merit repayment in thewider public interest.

The potential for these distortions to result from an acceptance of parity underlines theimportance of clarifying who the “shareholders” and “unsecured creditors” are. That is tosay, it is difficult to assess the weight to be given to arguments for parity without knowingwhether the actual composition of these two groupings substantiates perceptions of theirrelative power or vulnerability. No statistical breakdowns could be found regarding themake-up of the unsecured creditor class,160 but studies of share ownership in the US andAustralia respectively reveal a great deal about the nature and extent of share investmentsin the two countries. It is recorded that in the US in 2008, nearly half of all householdsowned either equity or bonds.161 Depending on their age, the primary goals of investorswere saving for a home purchase and education (under 40s), saving for retirement (40–64years) or generating current income (65 years and older).162 Having long-term investmentgoals meant that most equity-owning households were not frequent traders, and had notevidenced a pattern of buying and selling in response to the stock market conditions in2007.163 These appear to be the buy-and-hold investors described in the wealth transferproblem mentioned above, who indirectly bear the cost of judgments or settlements againstthe company in favour of shorter-term investors. Furthermore, it was found that a largenumber of investors had purchased their equities/bonds through professional financial


157 For instance, the CAMAC Report, n. 69 above, in Australia considered the implications for corporatefinancing (domestic and international), trade creditors, and the standing of Australian companies in corporatebond and distressed debt markets, paras 2.4.1–3. Davis, a proponent of parity in the US long before theintroduction of Fair Funds, also sees the creditor class as being dominated by large financial institutions“although it includes many comparatively small claimants in the form of trade creditors and individual holdersof the debtor’s bonds and debentures”; Davis, “The status”, n. 15 above, p. 29.

158 See para. 2.19 of the government White Paper, Productivity and Enterprise: Insolvency: A second chance CM 5234(London: HMSO/DTI 2001). Abolished via s. 251 of Enterprise Act 2002, amending Sch. 6 of the InsolvencyAct 1986 to remove preference for debts due to the Inland Revenue, Customs and Excise, and in respect ofsocial security contributions.

159 Office of Fair Trading, The Market for Corporate Insolvency Practitioners (London: Office of Fair Trading/Crown2010), para. 4.61.

160 The study by the UK Office of Fair Trading states that “[u]nsecured creditors range from larger, repeatunsecured creditors such as Her Majesty’s Revenue & Customs . . . and large landlords (in England & Wales)to customers, trade creditors and employees”; ibid. para. 1.13.

161 Equity and Bond Ownership, n. 156 above, p. 5.162 Ibid. pp. 27–8.163 Ibid. p. 47.

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advisers, rather than through retirement plans at work.164 Contrary to the perception ofmodern shareholders being resourceful and more knowledgeable about the risks attachedto different share offerings,165 ownership of equities through professional advisers waspredominant across all investor groups, regardless of age, education level, householdincome, etc.166 Most households that acquired equities through professional advisers wereshown to regularly rely on their advisers for investment advice and guidance.167 Likewise,in Australia 41 per cent of the adult population owned shares in 2008, the main reasons forinvesting being “to make money”; accumulate wealth; for long-term capital gains; and toobtain higher returns.168 There was no marked pattern of frequent buying and selling:between 2002 and 2008 the average value of share trades did not exceed 11 per cent of theaverage value of monies invested.169 Australian investors could be distinguished from thosein the US by their use of the internet to buy shares, and the division of share-owners intosegments according to their level of knowledge/skill and passion for investing.170 A sharpcontrast may be drawn between the two countries and the UK where individual shareownership levels have declined.171

The recognition that a significant number of investors are private individuals seeking toraise funds to pay for their homes, make provision for education or secure theirretirement172 therefore adds another dimension to this debate. These parties may bedeemed to be in a comparable position to that of unsecured creditors, in that they are intruth dealing with the company as outsiders, with similar limitations in their knowledge ofits business and matching expectations to be supplied with accurate information. Thestudies detailing their long-term outlook on investment, infrequent trading activity, andlimited self-reliance in transacting on the market, indicate that their insight into the risksattached to their investments is not as keen as it may be deemed to be.

Conclusion

This paper has sought to demonstrate how, as a matter of principle, grounds exist foraccepting parity as a response to modern conditions. Nevertheless, it is clear that themanner and consequences of implementing such a policy require careful analysis. In


164 Equity and Bond Ownership, n. 156 above, p. 37.165 See text accompanying nn. 75–7 above.166 Equity and Bond Ownership, n. 156 above, p. 45.167 69% of these equity/bond owners “always” or “sometimes” consult their advisers when making investment

decisions: ibid. p. 41.168 ASX, 2008 Australian Share Ownership Study (Sydney: Australian Securities Exchange 2009), pp. 3–15.169 Ibid. p. 18.170 56% of investors bought shares through an online broker in 2008 (ibid p. 20), compared with the US where

the least frequently-mentioned use of the internet was to buy or sell stocks/bonds (see Equity and BondOwnership, n. 156 above, p. 37) – investors used it mainly to access financial accounts or get financial news. Asregards segmentation, ASX 2008 classified investors as “confident”, “aspirational”, “diligent” or “delegator”.

171 10.2% of the value of all UK ordinary shares quoted on the London Stock Exchange is held by individuals,compared with 54% in 1963 and 14.1% in 2001: see Office for National Statistics, Share Ownership Survey(London: Crown 2010). In terms of household percentage, 34.2% of UK households hold shares (includingUK shares, stocks and shares investment savings accounts, employee shares and share options, and overseasshares): Office for National Statistics, Wealth in Great Britain: Main results from the wealth and assets survey 2006/08(London: Crown 2009).

172 United States SEC, The Investor’s Advocate: How the SEC protects investors, maintains market integrity, and facilitatescapital formation, available at http://www.sec.gov/about/whatwedo.shtml. Some investors may be formeremployees of companies who have received benefits in the form of shares: See A Hill, S McNulty and E Wine,“A poor retirement: the bankruptcy of Enron has brought into uncomfortably sharp focus broader doubtsabout the way that US employees invest for their old age”, Financial Times, 12 December 2001.

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practical terms, it may prove to be a token shift, given the fact that unsecured creditors oftenmake no recoveries on their claims.173 Furthermore, distributions aimed at compensatinginjured investors will be difficult to reconcile with this long-standing interpretation of thestatutory pari passu rule:

. . . everybody shall be paid pari passu, but that means everybody after thewinding-up has commenced. It does not mean that the Court shall look into pasttransactions, and equalise all the creditors by making good to those who have notreceived anything a sum of money equal to that which other creditors havereceived. It takes them exactly as it finds them, and divides the assets amongstthe creditors, paying them their dividend on their debts as they then exist.174

The US experience shows that the policies underlying investor protection, such asdeterrence and compensation, and a regulatory body’s power to enforce them, can situneasily with the understanding of “equality of distribution” in an insolvency context. Inthe UK, the Davies Review of Issuer Liability concluded that the question of subordinatingdefrauded shareholder claims needed further investigation, noting that it raised importantgeneral issues about the nature of equity investment in companies and the role of legalcapital.175 The growing correspondence between the positions of shareholders andunsecured creditors highlighted in this paper should not convey the impression that theincorporation of defrauded shareholder interests into the unsecured creditor class can beachieved through a simple grafting-on process. It carries implications for the essence of theinsolvency distribution regime, and should accordingly be approached with care.


173 Noted by Gengatharen: R Gengatharen, “Sons of Gwalia: defrauded shareholders claims in insolvency” (2008)17 International Insolvency Review 1, at p. 7. See also R J Mokal, Corporate Insolvency Law: Theory and application(Oxford: OUP 2005), ch. 4. The impact of parity on the cost of administering the estate may in fact furtherdiminish their recovery levels: Hargovan and Harris, “Sons of Gwalia”, n. 78 above, consider the implicationsof parity for the efficient handling of claims in insolvency.

174 In re Smith, Knight & Co. ex parte Ashbury (1868) LR Eq 223, at 226 (per Lord Romilly MR).175 P Davies QC, Davies Review of Issuer Liability: Final report (Norwich: Stationery Office 2007), paras 61–2. It was

recommended that the UK government should consider adopting the Australian CAMAC Report, n. 69above, as part of any future policy developments in this area, but one wonders whether this recommendationwould be maintained given the Australian government’s advice to pursue explicit statutory subordinationcontrary to CAMAC’s advice.

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Not an invitation to rape: the SexualOffences Act 2003, consent and the case of

the “drunken” victimGEORGINA FIRTH*

Law School, Lancaster University

NILQ 62(1): 99–118

The aim of this paper is to look at the development of the law of consent in the light ofthe changes in the law and consider whether the reforms have achieved their stated aims

of providing “coherence and clarity”. I will seek to argue that whilst there has been someprogress and some recognition of the problems faced by rape complainants, changes to thesubstantive law alone will not make a significant difference, particularly in cases of rapeinvolving alcohol. What is needed is a broader reform agenda which tackles problematiclegal definitions but also seeks to change stereotypical perceptions of rape complainantsthrough measures such as effective public information campaigns and the strategic use ofexpert evidence. In the light of these suggestions, it is argued that the decision of thegovernment to abandon further reform proposals, such as a rebuttable presumption ofnon-consent where the victim is intoxicated, is a missed opportunity which has led to areturn to the position prior to the Sexual Offences Act (SOA) 2003. The effect of this isthat societal attitudes to rape and rape myths continue adversely to influence verdicts, tointerfere with the proper consideration of the specific evidence in “difficult” cases, and toundermine the efforts of policy and legislation to bring about meaningful change.

Introduction

The law in relation to rape has received considerable attention in recent years. However, thefocus of much of the reform has been on the substantive law and, in particular, the vexedissue of consent. The definition of consent set out in s. 74 of the SOA states that “a personconsents if he agrees by choice and has the freedom and capacity to make that choice”. Theaim of enacting a statutory definition was to “bring coherence and clarity to the meaningof consent”.1 To further this aim and reinforce the new definition, in March 2006 thegovernment launched an advertising campaign.2 One of the advertisements contained afull-page image of a woman’s torso. She is naked save for a pair of knickers with a no-entrysign emblazoned on the front. The text across the bottom of that page reads “Have sexwith someone who hasn’t said yes to it, and the next place you enter could be prison.”3

* The author would like to thank the anonymous reviewer for valuable comments on an earlier draft of thispaper.

1 R v Bree [2007] EWCA Crim 256, at 22.2 www.homeoffice.gov.uk/crime-victims/reducing-crime/sexual-offences/.3 Arguably, the text of the advertisement is also objectionable as it presents a one-dimensional way of thinking

about a woman’s body as a place that another enters.

Whilst the government’s concern on this issue is laudable, it is somewhat disturbing thatthey considered that this was an appropriate image to convey the consent message. Inchoosing this image to get their message across, the government is, perhaps unwittingly,reinforcing the kind of stereotypes and rape myths that continue to plague the rape lawsand ensure low conviction rates. The advertisement presents the woman as a body. Thevisual message seems to be that consent is to be read from that body and not from thecontext of what a woman says or her understanding of the situation (after all, she has nohead with which to speak in the advert).

The problem raised by this advertising campaign – namely the ghostly silence ofwomen’s real voices and experiences from the rape trial – is one that has concernedfeminists for many years4 and it is worrying that despite substantial reform the same issuescontinue to arise. Recent case law, such as Hagan,5 Dougal 6 and Bree,7 indicates clearly thatthe problems that feminist writers have long sought to identify in relation to consent andhow it should be interpreted by the law have not been resolved. This is particularly thesituation in the difficult cases, for example, those where there is a degree of acquaintancebetween the parties or where alcohol is involved. Undeniably, it is often difficult todetermine how consent is given and understood under these conditions, but whenimportant questions of definition remain in the hands of the judiciary will the positionimprove? The case of Bree would suggest not and it is a matter of concern that this case hasled to the government abandoning proposals for further revision of the consent provisionsunder the Act, despite considerable academic and media criticisms of judicial and jurordecision-making in this area.8

The Home Office review and legislative change: the ghost of consent past

As a starting point, it is worth considering the review that took place prior to the enactmentof the SOA and setting out what it sought to achieve in terms of the protection ofparticularly vulnerable victims. Although the law on rape has undergone a number oflegislative and procedural changes over a period of years, it is clear from the consistentlypoor conviction rates that there had been little improvement from the perspective of thefemale rape complainant.9 The most significant contribution to the process of reform inrecent years is the SOA, which followed the Home Office consultation document Setting theBoundaries: Reforming the law on sex offences.10 The two-volume document was the result of a


4 For recent feminist engagements with this subject, see R Hunter and S Cowan (eds), Choice and Consent: Feministengagements with law and subjectivity (Oxford: Routledge-Cavendish 2007), chs 3, 5, 6 and 9; J Temkin and B Krahe(2008) Sexual Assault and the Justice Gap: A question of attitude (Oxford: Hart (2008).

5 N Britten, “Student is cleared of raping fresher he was meant to be caring for”, Daily Telegraph, 3 November2006.

6 R v Dougal (2005) Swansea Crown Court (unreported). In this case, the prosecution offered no evidence onthe basis that a drunken consent is still consent, after the complainant testified that she could not rememberwhether or not she had consented to intercourse. For criticism of Dougal, see: C Gammell, “Judge ‘dreadfullywrong’ over rape ruling”, The Independent, 24 November 2005; C Elliott and C de Than, “The case for a rationalreconstruction of consent in criminal law” (2007) 70 Modern Law Review 225, p. 240, and the Court of Appealin Bree [2007] EWCA Crim 256, para. 32.

7 [2007] EWCA Crim 256.8 J Rozenberg, “Law on consent in rape cases is clear enough”, Daily Telegraph, 21 June 2007. See also

N S Rumney and R A Fenton, “Intoxicated consent in rape: Bree and juror decision-making” (2008) 71(2)Modern Law Review 271–302; J Temkin and A Ashworth, “The Sexual Offences Act 2003: (1) Rape, sexualassaults and the problems of consent” (2004) Crim LR 328–46; Elliott and de Than, “The case for a rationalreconstruction”, n. 6 above.

9 J Bindel, “Just another week of rapes”, The Guardian, 29 May 2009; R Williams, “Postcode lottery in rapeconvictions getting worse”, The Guardian, 10 June 2009.

10 Home Office, Setting the Boundaries: Reforming the law on sex offences (London: Home Office 2000).

series of consultations, deliberations and proposals arising from the Review of SexOffences, which was established by the Home Secretary to provide recommendations for“clear and coherent offences that protect individuals . . . from abuse and exploitation, andenable abusers to be appropriately punished”.11 Whether the specific recommendations inrelation to the law of rape have achieved these objectives or, indeed, whether they evenadequately address the problems raised are the focus of the next section.

Both Lacey12 and Rumney13 criticised the remit of the government review in so far asit focused exclusively on the revision of the substantive law of rape. The consequence ofthis focus was inevitably that important issues relating to the way in which legal definitionsof rape are interpreted and enforced by the criminal justice system and the norms,assumptions, images and values that shape that enforcement process were excluded fromconsideration. As Rumney has argued, the exclusionary focus serves to “obscure thepractices of criminal justice agencies that hinder the effective enforcement of the law” andgives the “implicit impression” that “such problems can be resolved by [a] limited revisionof the substantive law”.14

A further and connected danger of such an approach, identified by Lacey, was that,despite the review’s apparent appreciation that sexual offences can be seen as tracing theboundaries of what is socially regarded as right and wrong in the area of sexual conduct,15

it downplayed:one of the most powerful aspects of criminal law . . . its reflection andreinforcement of certain ideas of the sexually normal, including thesex/gender roles and stereotypes which any informed reader of the research orobserver of practice knows make a decisive difference to the implementationof sexual offences.16

It would therefore appear that the review’s recommendations would do little toundermine the pervasive myths and stereotypes of female sexuality that have so longplagued the effectiveness of rape law from the point of view of complainants. This can beseen from both the judgment in Bree and the apparent lack of impact of the government’sadvertising campaign, referred to earlier, in changing public perceptions of “real rape”.17

Throughout its consideration of the law of rape, the review sought to strike a balancebetween what it saw as “the key moral imperatives of individual autonomy”,18 bearing inmind a perceived increased liberality in social attitudes towards sex, and the “protection ofthe vulnerable”, recognising the harmful consequences of sexual assault. Amongst theconclusions drawn as a result of this balancing exercise was a proposal to widen the scopeof the definition of sexual intercourse and an attempt to uncover and then specificallydefine the boundaries of the constructs of consent and non-consent.19

Not an invitation to rape

11 Home Office, Setting the Boundaries, n. 10 above, Jack Straw at vol. 1, p. i.12 N Lacey, “Beset by boundaries: the Home Office Review of Sex Offences”, (2001) 3 Crim LR, p. 11.13 P Rumney, “The review of sex offences and rape law reform: another false dawn?” (2001) 64 Modern Law

Review 890, p. 890.14 Ibid. p. 890.15 Vol. 1, para. 1.1.3.16 Lacey, “Beset by boundaries”, n. 12 above.17 This has since been confirmed by research into the impact of the advertising campaign. See Temkin and

Krahe, Sexual Assault, n. 4 above.18 Lacey, “Beset by boundaries”, n. 12 above, p. 5.19 I use the term construct here in the context of legal reform. However, I appreciate that consent is something

much more than just a legal or social construct.

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Consent and communicative sexuality: consent futures?

Feminist critique has long argued that the lack of a statutory definition of consent in rapehas allowed gender myths and stereotypes to expand the space for male subjectivity andallowed the defendant to read off consent from the complainant’s demeanour, body andsexual reputation at the expense of her voice. The review recognised and re-affirmed thecentrality of consent/non-consent to the offence of rape20 but appreciated that it was notunproblematic. It saw the problems inherent in the concept of consent as being due to thelack of a clear statutory definition. It therefore proposed to overcome these difficulties bydefining consent as “free agreement”21 and by setting out a non-exhaustive list of examples,illustrating circumstances in which consent in the sense of free agreement is not present. Itwas suggested that this list could form the basis of model judges’ directions; for example:

In deciding whether the complainant did freely agree to sexual intercourse . . . youshould not assume that the complainant did freely agree just because they did notsay or do anything . . . [or] just because they did not protest or physically resist.22

The review made clear that, in defining consent, it was not seeking to change itsmeaning23 but to enable judges to explain clearly what the law says and juries to understand“just what is meant by consent”.24 The definition of consent approved by the review is nowfound in s. 74 of the SOA, which states: “A person consents if he agrees by choice and hasthe freedom and capacity to make that choice.” This definition is supplemented by s. 75,which contains six evidential presumptions against consent, and s. 76, which contains twoconclusive presumptions of non-consent.25 Interestingly, the review’s recommendation thatthere be an evidential presumption against consent where a person was too affected byalcohol to give free agreement26 did not find its way into the law because of concerns bythe Home Secretary that such a presumption would lead to “mischievous accusations”.27


20 Home Office, Setting the Boundaries, n. 10 above, vol. 1, paras 2.10.1–3. Interestingly, the review claimed that itwas not changing the meaning of consent but merely providing clarification. I would argue that this claim issomewhat disingenuous and that by inscribing a communicative model of sexuality into the meaning ofconsent, the review is indeed attempting to change the way in which consent is understood. From a feministperspective, this is to be welcomed. However, whether this change in meaning will have a practical effect onthe conduct of the rape trial in the absence of a corresponding change in the contextual, evidential and socialnorms is to be doubted. See also Rumney’s consideration of how this shift may alter perceptions of criminalliability: Rumney, “The review”, n. 13 above, p. 903.

21 Clarified by the review as a voluntary agreement between two parties to engage in sexual intercourse: HomeOffice, Setting the Boundaries, n. 10 above, vol. 1, paras 2.10.4–5.

22 Ibid. vol. 1, paras 2.11.1–6. At para. 2.10.6, the review expressed the opinion that the provision of guidelineson the meaning of consent would help both practitioners and jurors in coming to decisions in particular cases.Unfortunately, the government rejected this standard direction and the formulation of a standard directionwas left to the Judicial Studies Board and the Court of Appeal.

23 Ibid. vol. 1, para. 2.10.3. See n. 33 below and the accompanying text.24 Ibid.25 For a critique of the provisions and, in particular, the way in which consent was framed and the working of

the presumptions, see Temkin and Ashworth, “The Sexual Offences Act”, n. 8 above. McEwan argues that itis not clear that those presumptions will have much effect on the process or outcome of a case in J McEwan,“Proving consent in sexual cases: legislative change and cultural evolution” (2005) 9(1) International Journal ofEvidence and Proof 1.

26 Home Office, Setting the Boundaries, n. 10 above, vol. 1, para. 2.10.9.27 Home Office, Convicting Rapists and Protecting Victims: Justice for victims of rape (London: Home Office 2006),

ch. 3.

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Communicative sexuality – a desirable but problematic notion

As Rumney notes, the use of free agreement as the basis of a definition of consentindicates the increasing influence of the concept of “communicative sexuality” within rapelaw.28 Communicative sexuality gained purchase in feminist legal thought through an articlein 1989 by Lois Pineau entitled “Date rape: a feminist analysis”. Pineau was writing at theheight of the concern in 1980s USA about the phenomenon of acquaintance or date rape.29

Her aim was to argue for the more effective criminalisation of non-consensual sex amongstacquaintances in which there was no physical injury or threat of injury by developing amodel of communicative sexuality. She critiqued the existing law on the basis that thecurrent legal definition of consent focused on what the man thought was happening. InPineau’s view, in deciding whether or not a rape occurred, the focus should be directedtowards whether or not the woman actually consented to the sexual encounter.30 Sheposited that the court should therefore work backwards from actual consent to anunderstanding of when it is reasonable for a man to believe that there was consent.31

Pineau moved on from this proposition to develop criteria for consensual sex. Shestarted from the assumption that it is not reasonable for women to agree to coerced sex orfor men to believe that women have so agreed.32 Her strategy for arguing this was, firstly,to seek to dispel the myths that posit a normal seduction as aggression and submission33

and then, in its place, to develop a picture of a sexual relationship that undermined thecurrent gendered view that pressured sex can also be consensual. For Pineau, the essenceof a good sexual relationship is mutuality, “communicative sexual partners will notoverwhelm each other with the barrage of their own desires . . . a person engaged incommunicative sexuality will be most concerned with the mutuality of desire”.34

She asserts that in sexual relationships, as in friendships, each person has a duty torespect the other and in order to develop this mutual respect and understanding there is aneed for communication.35 Aggressive or coercive sex lacks this “essence of mutuality”and, therefore, Pineau suggests that it is not sex to which it would be reasonable for awoman to consent or for a man to believe that she is consenting and thus to pursue.36

Pineau asserts that non-consent in legal terms would therefore be made out when it can beshown that the sex involved in the allegation was not “communicative”.37 As Rumney notes,


28 Rumney, “The review”, n. 13 above, p. 899.29 L Pineau, “Date rape: a feminist analysis” (1989) 8 Law & Philosophy 217, p. 236. For a review of the

background to the article and a consideration of Pineau’s argumentation, see the introduction in L Francis,Date Rape: Feminism, philosophy and the law (University Park PA: Pennsylvania University Press 1996). Pineau’sarticle is also reprinted in full in this book. Pineau’s model of communicative sexuality has been the subjectof a lively debate, particularly among male commentators. For examples of a variety of criticisms of Pineau’smodel, see chs 2–4 in Francis. For a male perspective, see M Cowling, Date Rape and Consent (Aldershot:Ashgate 1998).

30 Pineau, “Date Rape”, n. 29 above, p. 224.31 Ibid. pp. 234–5.32 Ibid.33 Ibid. pp. 225–33.34 Ibid. p. 236.35 Ibid. p. 235.36 Ibid. p. 234.37 Ibid. pp. 239–40. Critics of Pineau have sought to argue that this model of sexuality fails to encompass

women who enjoy submissive sex. However, I would argue that there is nothing in Pineau’s model thatprevents these women communicating this desire to their partners in advance. For an example of Pineau’smodel in action, see the Antioch College Sexual Offence Policy discussed in Francis, Date Rape, n. 29 above,pp. xviii, 65–7, 135–75.

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at face value, the notion of free agreement may have benefits for rape complainants seekingto prove their cases in that it challenges the assumption that a woman is available forintercourse when she is in no position to choose and the belief that coercion may be anacceptable means by which to force a woman into sex.38 This could also have repercussionsfor cases where women are so heavily intoxicated that it is arguable that their ability to makechoices is significantly impaired. However, that will depend upon a robust interpretation ofcapacity to consent as I will discuss later.

Feminist legal thought has long argued that free agreement involving notions such asrespect for the autonomy of others and sexual integrity should lie at the heart of any legaldefinition of rape and its enforcement.39 Free agreement clearly has the potential to bemore effective in constructing sexual encounters where there is no agreement, verbal orotherwise, as rape.40 This may explain Rumney’s observation that the review’srecommendations concerning free agreement appear to have received little criticalcomment.41 Many other jurisdictions had already adopted the notion of communicativesexuality in their definitions of consent42 and the review had access to information aboutthe content and structure of this legislation in a number of jurisdictions.43 However, theavailable research on the operation of the model in other jurisdictions would seem tosuggest that the inscription of communicative sexuality into the core concepts of rape lawis not unproblematic, both ideologically and procedurally.44

In her original article and in a response to her critics,45 Pineau suggested that her modelof communicative sexuality would open the way for rape prosecutors to shift the focus ofblame from the complainant to the defendant through questioning that focused on whatactions the accused took to ensure that she was consenting.46 The government reviewseemed to have taken Pineau’s argument on board when it stated that such a shift wouldtake place as a result of their definition of consent.47 However, I would argue that thecurrent reality of rape trials in England is such that the claim that the focus of rape trialswill shift because of this new definition alone is problematic. The government initiallyappeared to recognise this in the recent consultation paper Convicting Rapists and ProtectingVictims – Justice for victims of rape.48 However, the fact that it has now abandoned furtherproposals for reform of the substantive law following Bree may be a missed opportunity.


38 Rumney, “The review”, n. 13 above, p. 899.39 N Lacey, Unspeakable Subjects: Feminist essays in legal and social theory (Oxford: Hart 1998); N Naffine, “Possession:

erotic love in the law of rape” (1994) Modern Law Review 10.40 Some commentators have argued that free agreement implies something more than silence and that it may be

problematic where a woman remains silent, not through fear but through a willingness to engage in sex.However, Rumney suggests, and I would concur, that consensual yet silent sex is unlikely to give rise to anallegation of rape. Rumney, “The review”, n. 13 above, p. 903.

41 Ibid. p. 899. Rumney here is referring specifically to Lacey, “Beset by boundaries”, n. 12 above; M Bowley,“New Labour, new sex”, NLJ, 28 July 2000, p. 1134; J Temkin, “Getting it right, sexual offences law reform”,NLJ, 4 August 2000, p. 1169.

42 Rumney, “The review”, n. 13 above, pp. 899–901.43 Home Office, Setting the Boundaries, n. 10 above, vol. 2, Appendices E, F and G.44 For a critique of the Australian and New South Wales models, Naffine, “Possession”, n. 39 above, pp. 23–9.

In relation to the US model, see P R Sanday, A Woman Scorned: Acquaintance rape on trial (London: Universityof California Press 1996), ch. 12.

45 L Pineau, “A response to my critics”, in Francis, Date Rape, n. 29 above, ch. 5.46 Pineau, “Date rape”, n. 29 above, pp. 240–1.47 Home Office, Setting the Boundaries, n. 10 above, vol. 1, para. 2.11.4.48 Home Office, Convicting Rapists, n. 27 above.

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To assume that a cultural and procedural change in the trial process would occurovernight through the enactment of a statutory definition alone would be somewhat naive.Rumney suggests, and this has to some extent been borne out, that the communicativemodel may be helpful in cases where the complainant suffers serious physical harm, wherethere is corroborative evidence, or where the woman is incapable of communicatingagreement because she is unconscious through, for example, drugs or drink.49 However, ashe notes, the court very often interprets these scenarios as “real rapes” in any event and,thus, convictions are less difficult to obtain.50

In the area of acquaintance rape, where the law has great difficulty in distinguishingbetween consensual sex and rape, it is difficult to envisage how this new definition wouldshift the focus decisively away from the complainant without further elaboration. She stillhas to give evidence and be cross-examined. Her behaviour, dress and demeanour are stillsubject to detailed examination and comment by the defence counsel “in order to establishwhether or not there was agreement, the nature and content of that agreement and whetherthere was any ambiguity in what the complainant said or did”.51 Further, even though theSOA departed from the subjective Morgan defence of honest belief52 and replaced it with atest of reasonable belief, this belief has been interpreted as partly subjective and thereforethe defendant’s point of view as to whether or not there was free agreement remains thelegal point of view and, thus, possibly decisive when this defence is run.53 This wasconfirmed by the Court of Appeal in the recent decision of Bree.54

Ideologically, the notion of free agreement clearly raises the issue of the “respectiveresponsibilities of men and women”.55 Several commentators have suggested that thestandard will not only require men to ensure that they have consent but also place a burdenon women to communicate clearly. This is recognised by the review.56 However, thisimplicit requirement may be potentially problematic as it may underline beliefs that womenare in some way responsible for rape when they have not clearly and perhaps verbally andphysically, through resistance, expressed their non-consent. As Rumney notes, “given theprevalence of attitudes within both society and the criminal justice system which attribute


49 Rumney, “The review”, n. 13 above, p. 900.50 Ibid. p. 900.51 Ibid. p. 901. Carol Smart, in Feminism and the Power of Law (London: Routledge 1989), pp. 34 and 42, notes that

telling the story of rape inevitably reveals ambiguities, for example, a woman may agree to intimacy but notintercourse. In a trial when credibility is in issue, these ambiguities will be used to discredit her account of rapeand subsume the rape into the “normal” pattern of submission and the individual woman into a singlecategory of “Woman” known to be “capricious and mendacious”.

52 Lacey notes that the review justified its stance by asserting the disproportionate costs to the defendant andvictim of establishing consent on the one hand and of a mistake being made on the other: Lacey, “Beset byboundaries”, n. 12 above, p. 12.

53 Whilst the review suggested that the controversial Morgan defence should remain, it did recommend that thedefence should not be available if the accused did not take all reasonable steps in the circumstances toascertain free agreement at the time; or where the defendant was in a state of self-induced intoxication, or ifthe defendant was reckless: Home Office, Setting the Boundaries, n. 10 above, vol. 1 para. 2.13.8. Contrary to thereview’s recommendations, the Act replaced the Morgan test with a test of reasonable belief. However, thecourts have applied the test of reasonableness in a similar way to the reasonableness requirements of thedefence of provocation. This means that characteristics of the defendant will be taken into account. SeeTemkin and Ashworth, “The Sexual Offences Act”, n. 8 above.

54 R v Bree [2007] 2 All ER 676, para. 34. On this point see, J Elvin, “Intoxication, capacity to consent and theSexual Offences Act 2003” (2007) King’s Law Journal 151, p. 156.

55 Rumney, “The review”, n. 13 above, p. 901, and Pineau, “Date rape”, n. 29 above, pp. 234–5.56 Home Office, Setting the Boundaries, n. 10 above, vol. 1, para. 2.10.3.

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blame for sexual violence to women57 (it is not unreasonable to assume that) any notion ofresponsibility may disproportionately fall on the woman”.58 I will return to this issue ofresponsibility later in relation to cases of rape involving alcohol.

A further potential difficulty, inherent in the notion of free agreement, is that it appearsto place considerable emphasis on the nature and quality of communication. Researchevidence from Canada and the United States59 has clearly indicated that current genderednotions of the normality of a coercive model of sexual intercourse mean that men (andwomen) have internalised gendered myths about women’s willingness to engage in sexualintercourse. For example, that a woman who initiates a date, enters a man’s flat or acceptsdinner from him is expressing a willingness to sleep with him or even that such actionsentitle a man to sleep with a woman against her wishes.60 The review potentially added tothese problems by recognising both verbal and non-verbal sexual consent.61 This widenotion of communicative sexuality is arguably positive in that it recognises the reality ofsexual relations.62 However, it also potentially allows defendants to contradict complainants’verbal expressions of non-consent by feeding into the myths and stereotypes alreadyreferred to. Such myths and stereotypes continue to play an important if hidden role in thetrial process and, thus, the notion of free agreement alone is unlikely to unequivocallybenefit complainants or substantially increase the protection offered by the criminal law.63

Despite the inferences that can be drawn following the changes in the law in theCriminal Justice and Public Order Act 1994, s. 34, there is still no requirement that thedefendant give evidence in English law, even though the new definition requires in s. 1(2)that the jury consider the defendant’s reasonable belief in “all of the circumstancesincluding any steps the defendant has taken to ascertain whether the victim consents”.64

Furthermore, there is no guarantee that a complainant’s account will withstand cross-


57 See M Amir, Patterns in Forcible Rape (London: University of Chicago Press 1971) in relation to notions ofcomplainants’ contributory negligence.

58 Rumney, “The review”, n. 13 above, p. 901.59 For example, see: T P Humphreys and E Herold, “Date rape: a comparative analysis and integration of

theory” (summer 1996) 5(2) Canadian Journal of Human Sexuality 69; D M Truman, D M Tokar and A R Fischer,“Dimensions of masculinity: relations to date rape supportive attitudes and sexual aggression in datingsituations” (July–August 1996) 74 Journal of Counselling & Development 555; V Van Wie, A M Gross and B P Marx, “Females’ perception of date rape: an examination of two contextual variables” (December 1995)1(4) Violence Against Women 351.

60 Ibid.61 Home Office, Setting the Boundaries, n. 10 above, vol. 1, para. 2.10.4. Some authors have argued that nothing

less than a specific “yes” should count as consent. See S Schulhofer, Unwanted Sex: The culture of intimidation andthe failure of law (London: Harvard University Press 1998). However, other commentators have argued thatcommunicative sexuality as a concept is objectionable because it appears to focus less on the presence ofconsent than on how someone should consent to sex: see H Reece, “When a woman says ‘no’ she means ‘no’”,NLJ, 7 November 1997, p. 1616. I would, however, agree with Rumney and the Campaign against Rape, whenthey argue that Reece has misunderstood communicative sexuality. There is nothing in Pineau’s work tosuggest that she wishes to stipulate where people should have sex or what sexual positions they should adopt.For Pineau, these are matters of individual choice based upon mutual communication and respect.

62 For a full discussion, see D Archard, Sexual Consent (Boulder: Westview Press 1998).63 J Kelly, J Lovett and L Regan, A Gap or a Chasm? Attrition in reported rape cases, Home Office Research Study

293 (London: Home Office 2005); E Finch and V E Munro, “Juror stereotypes and blame attribution in rapecases involving intoxication: the findings of a pilot study” (2004) 44 BJ Crim 1–14; E Finch and V E Munro,“The Sexual Offences Act 2003: intoxicated consent and drug assisted rape revisited” (2004) Crim LR 789; EFinch and V E Munro, “Breaking boundaries? Sexual consent in the jury room” (2006) 26(3) Legal Studies303–20.

64 Criminal Justice and Public Order Act 1994, s. 34; Sexual Offences Act 2003, s. 1(2).

examination65 or that there will be sufficient corroborative evidence to persuade a jury toconvict.66 Therefore, the evidential and procedural standards that continue to govern thetrial process will ensure that the primary focus of rape trials will continue to be on thecomplainant and the defendant’s perception of her state of mind. Given the current highattrition rates and the attitudes of the police and Crown Prosecution Service to rapeallegations, any refocusing of the trial process is unlikely to benefit many complainantswithout a concomitant refocusing of societal and institutional attitudes to acquaintancerape, as will become clear when the case of Bree is considered below.67

The case of the intoxicated victim: consent unravelled againor the spectre of the past?

Recent cases68 decided using the new definition of consent appear to demonstrate that theconcerns raised at the time of the reform have now been realised and that, in isolation, thenew definition of consent has not had a significant effect on conviction rates in rapecases.69 Arguably, many of the cases that have been reported in the media involveparticularly difficult issues, combining the question of acquaintance (however brief) and therole of alcohol in sexual encounters. However, it is precisely these difficult cases which havecontributed to the high attrition rates in rape cases and prompted the need for reform inthis area, so it would seem that they are an important indicator of the success or otherwiseof the new definition.70 Several of these cases (Dougal in particular) raised renewed concernabout the effectiveness of the definition of consent in the SOA and in particular, whetherit can offer protection to women in especially vulnerable situations. These concerns werereinforced by research that indicates that juries are reluctant to convict men of rape in casesin which the victim has been drinking.71

As a result of the publicity surrounding cases such as Dougal, the Home Office revisitedthe issue of consent in the consultation paper, Convicting Rapists and Protecting Victims: Justice for

Not an invitation to rape 107

65 Although there does appear to be evidence that false allegations of rape are rare. See S Lees, Carnal Knowledge:Rape on trial (London: Penguin 1996).

66 Rumney, “The review”, n. 13 above, p. 900. Z Adler, Rape on Trial (London: Routledge & Kegan Paul 1987);Lees, Carnal Knowledge, n. 65 above; and J Temkin, “Prosecuting and defending rape: perspectives from theBar” (2000) 27 Journal of Law and Society 219 have all recorded the marked reluctance of juries to convictdefendants in cases involving a degree of acquaintance. This, of course, corresponds with the widespreadsocietal views shown in psychological studies that such assaults are less serious than assaults by strangers and,indeed, in some circumstances, that they are not rape at all.

67 Rumney, “The review”, n. 13 above, fully addresses the limitations of the review in relation to the proceduraland evidential difficulties that were not addressed, for example, victim unwillingness to seek legal redress,attitudes and practices of criminal justice personnel and jurors’ attitudes (pp. 904–9). These issues have alreadybeen addressed to some extent elsewhere and therefore it did not seem appropriate or necessary to re-addressthem here. Rumney concludes, and I would agree, “effective legal change will only occur when there is an inclusive processof law reform that examines formal legal rules, their interpretation and enforcement” (p. 910). See also Lacey, “Beset byboundaries”, n. 12 above, pp. 11–13.

68 R v Dougal (2005) Swansea Crown Court (unreported); R v Hagan (2006) Nottingham Crown Court(unreported). For media reports of these cases see: G Roberts, “Drunken consent to sex is still consent, judgerules”, The Independent, 24 November 2005; N Britten, “Student is cleared”, n. 5 above.

69 R Williams, “Postcode lottery”, n. 9 above.70 In relation to attrition rates generally, see L Kelly, Rape in the 21st Century: Old behaviours, new contexts and emerging

patterns, Full Research Report, ESRC End of Award Report, RES-000-22-1679 (Swindon: ESRC 2007).71 Finch and Munro, “Breaking boundaries?”, n. 63 above, p. 306; Finch and Munro, “The Sexual Offences Act

2003”, n. 63 above. The research indicated that juries believed that it was reasonable for a man to assume thata woman’s silence amounted to consent, even when it was due to intoxication. They tended to hold a drunkenvictim partially responsible for what happened and they were less inclined to see taking advantage of adrunken woman as rape.

victims of rape.72 One of the key proposals in the paper was to consider whether consent needsfurther clarification in relation to the question of capacity, either in the form of a furtherdefinition and/or the creation of an evidential presumption.73 However, the judiciaryexpressed considerable hostility to the proposals on consent in the consultation paper andthe Court of Appeal took the opportunity in the case of Bree74 to undermine the consultationprocess and reclaim questions of interpretation as matters best left to the courts.75

Benjamin Bree had been convicted of the rape of a 19-year-old student. In brief, thefacts of the case were that he had spent an evening drinking with the student, who shared aflat with his brother. On their return to the flat, the complainant was sick and Bree helpedher to wash her hair. Her next memory was of finding herself on the bed with Bree havingsex with her. She told the jury that she had not consented. Bree’s defence was that the sexwas consensual and that he reasonably believed that she was consenting. The Court ofAppeal held that the essential question in this case was not whether the parties to the casewere less inhibited because they had been drinking, no whether they might have regrettedwhat had happened, nor whether they had acted irresponsibly, but simply whether theevidence proved that the appellant had intercourse with the complainant without herconsent.76 The judgment states that neither party had acted unlawfully in drinking to excessand that both were free, if they wished, to have intercourse with each other. The courtqualified the position somewhat saying that if, through drink or any other reason, thecomplainant has temporarily lost her capacity to choose whether to have intercourse on theparticular occasion, she is not consenting and, subject to questions about the defendant’sstate of mind, if intercourse took place, this would be rape. However, where the complainanthas voluntarily consumed even substantial quantities of alcohol but nevertheless remainscapable of choosing whether or not to have intercourse and in drink agrees to do so, thiswould not be rape.77 Finally, the court concluded that there was a clear definition of consentand that to try to set a level of intoxication that would negate consent would not be possible.Otherwise, “provisions intended to protect women from sexual assaults might very well beconflated into a system, which would provide patronising interference with the rights ofautonomous adults to make personal decisions for themselves”.78

The judgment appears, on the face of it, to be attempting to protect individualisticnotions of personal and sexual autonomy. However, I would argue that the Court of Appealin Bree dismissed the numerous concerns79 that had been raised about the new definitiontoo easily, situating the difficulty as one raised by the “infinite circumstances of human


72 Home Office, Convicting Rapists, n. 27 above.73 Home Office, Convicting Rapists, n. 27 above, ch. 3. As noted above, this was not a new concern and the review

prior to the SOA 2003 had recommended that a person was unable to consent when too affected by alcoholto give free agreement (para. 2.10.9). This suggestion was not included as a presumption under s. 75 due to aconcern expressed by the Home Secretary about false accusations.

74 R v Bree [2007] 2 All ER 676.75 J Rozenberg, “Judges reject government rape reforms”, The Telegraph, 24 January 2007; C Dyer, “Judges try to

block rape trial reforms”, The Guardian, 23 January 2007.76 R v Bree [2007] 2 All ER 676, para. 26.77 Ibid. para. 34. The guidelines set out in Bree can now be found in the specimen direction in cases involving

intoxication in the March 2010 version of the Crown Court Bench Book at www.jsbni.com/Publications/BenchBookRevisedApr2010.doc.

78 Ibid.79 For example, Temkin and Ashworth, “The Sexual Offences Act”, n. 8 above; Elliott and de Than, “The case

for a rational reconstruction”, n. 6 above; Finch and Munro, “The Sexual Offences Act 2003”, n. 63 above.

behaviour”80 rather than lack of clear statutory guidance.81 The judgment can be seen asproblematic in two ways. Firstly, whilst there are some attempts to focus on the legal issuesat stake,82 it fails to take proper account of the fact that the legal rules are not always appliedand interpreted by juries free of entrenched attitudes and behaviours which may bedamaging to rape complainants in cases involving alcohol. Secondly, the court failed to takethe opportunity to clarify the issue of the definition of capacity and to map this on to alegal definition of consent in a meaningful way.

Capacity and consent: when should drunken consent equate to legal consent?

The main issue at appeal was the lack of guidance on the issue of consent from the trialjudge to the jury and the judgment of the Court of Appeal agreed that the jury should begiven assistance on the question of capacity and the extent it can take this into accountwhen determining the issue of consent. However, it is noteworthy that nowhere in thejudgment did the court set out to clearly define capacity or to provide a model direction onconsent for trial judges to follow so it remains unclear what guidance on these issues jurorsshould be given in future cases. The specimen direction on capacity in the 2010 edition ofthe Crown Court Bench Book follows Bree on this, in that it simply states that “where aquestion of capacity arises in the evidence it must be left for the jury to decide”.83 In thecourse of the judgment, the Court of Appeal approved the pre-2003 case law and I suggestit is likely that in seeking to guide juries in the future, trial judges will resort to this case lawand the pre-2003 definitions of consent that have been problematic for complainants astoo much discretion is left to jurors and their interpretation of what “satisfies the ordinarymeaning of consent”.84

The judgment in Bree starts by setting out the relevant provisions of the 2003 Act anddeals with some of the debate prior to the Act. In this way, the Court of Appeal is indicatingthat it is aware of the debates and is sensitive to the issues that led to reform. However, thejudgment immediately seeks to legitimate and reclaim the interpretative role of the judiciaryin relation to the legislation by situating the difficulty in these cases as one of proof and notideology and, in doing so, it sidesteps the need to further define the capacity element of thenew definition. It notes that the Act is intentionally silent on the question of consent andthe voluntary consumption of alcohol and suggests that this is because the law was alreadyclear.85 Sir Igor Judge states that the presumptions negating consent set up in ss. 75 and 76of the Act deal with matters of “common sense”. It is held to be obvious that there wouldbe no consent where the victim is insensible and equally, it is a matter of common sensethat voluntary intoxication was not covered by the legislation, as it is a complex matter ofproof to be decided by reference to the facts on a case-by-case basis. In this way, thejudgment is using common sense and questions of proof as rhetorical devices to reclaimthe judicial high ground, avoid the need for further legislative intervention (such as apresumption of non-consent when the victim is heavily intoxicated, or a more generous


80 R v Bree [2007] 2 All ER 676, para. 36.81 Rumney and Fenton, “Intoxicated consent”, n. 8 above.82 R v Bree [2007] 2All ER 676, paras 25–6.83 Crown Court Bench Book, n. 77 above, p. 371. See also Hysa [2007] EWCA Crim 2056.84 Elliott and de Than, “The case for a rational reconstruction”, n. 6 above, p. 234. See also Rumney and Fenton,

“Intoxicated consent”, n. 8 above; Elvin, “Intoxication”, n. 54 above, pp. 151–7.85 Para. 27 of the judgment is important in this respect. The Court of Appeal states that before the 2003 Act, it

was not difficult to identify the relevant legal principle and for the judge to explain the law. It approves judicialdirections in Malone [1998] 2 CAR 447 and Lang [1976] 62 CAR 50 and disapproves at the same time anyquestion of further legal definition imposed by government. The clear implication is that there is no need forany further definition as the judiciary filled the gap in the law 30 years ago.

interpretation of capacity) and state that the judges are best placed to determine where theline between consent and non-consent should be drawn.

In relation to intoxicated complainants who are less than insensible, the judgmentexplicitly rejects the Home Office’s argument that consent or capacity has a special meaningthat should be determined by legislation and argues that such cases are best decided by relyingon the ordinary meaning of the term consent. Sir Igor Judge notes that questions aboutconsent when affected by voluntary intoxication can cover a wide range of states of mindand as such are social matters rather than something that lends itself to legislation.86 It canbe seen that, without explicitly stating that it is doing so, by linking the term consent with astate of mind that should be determined on the facts of the individual case, the Court ofAppeal is seeking to import into s. 74 the definition of consent found in Olugboja.87 Theconsequence of this is that, as in Olugboja, the judiciary is placing itself in a position ofauthority. There are clear indications throughout the judgment in Bree that determining thecorrect level at which intoxicated consent is no longer “real” consent is not something thatthe jury can do unaided, after all, that is what happened in the Crown Court in this case andled to the appeal.88 It is a matter for the judge and the jury is to accept the judge’s analysis ofconsent up to that point. The Court of Appeal appears to be arguing that setting theappropriate level of voluntary intoxication that negates consent would be too complex amatter for legislation because of the infinite variety in the facts of a particular case. For theCourt of Appeal, the ordinary meaning of consent is a matter of common sense, issufficiently clear, should depend on the individual facts of the case and is a matter for the juryto fix by applying its good sense and knowledge of human behaviour to the facts of the case.

The question that therefore arises is: what is the ordinary meaning of consent that thejudiciary is applying here? Is it the complainant’s state of mind that is in issue or could it bethe defendant’s state of mind, taking into account what he reasonably believed? How arethe jury to determine when the line between real but intoxicated consent and rape iscrossed? The Court of Appeal refused to fix a formula. It argued that it is a matter for thejury taking into account standards with which the jury is said to be familiar.89 However, toprevent the jury fixing the boundary in the wrong place, it is stated that the role of the judgeis to steer the jury to the right point through the discourses in the summing up.90 Inreclaiming this role for itself, the judiciary is inferring that its understanding of commonsense is drawn from and encompasses societal and cultural notions of what is right andappropriate. Common sense is a rhetorical device used to indicate the difference betweenreal rape where the victim is unconscious (and there is little difficulty in proving the fact ofrape) and the situation where the victim has voluntarily become intoxicated, consent is inissue and proof is more sensitive and difficult. In reclaiming an interpretative role, the judgeis placed in a position of authority as the most likely person to be able to find the truth ofan allegation. However, as Wallerstein notes, “in the case of the capability of the drunken


86 In making this argument, the Court of Appeal rather disingenuously relies on the article by Temkin andAshworth, which notes the philosophical difficulty in defining concepts such as freedom, choice and capacityand points out that the definitions remain “at large”: Temkin and Ashworth, “The Sexual Offences Act”, n. 8above, p. 336.

87 Gardner’s analysis of Olugboja clearly makes this link between consent and state of mind: S Gardner,“Appreciating Olugboja” (1996) 16(3) Legal Studies 275.

88 R v Bree [2007] 2 All ER 676, paras 39–42.89 Ibid. paras 35 and 36.90 Ibid. para. 39.

woman to consent to sex, the plummeting rate of rape convictions proves that commonsense seems to fail”.91

In seeking to address the criticism that arose following the case of Dougal, and in orderto justify its position, the court built on the analogy between drunken consent and drunkenintent that had been raised in the earlier case and which led to the phrase “a drunkenconsent is still consent”. However, as Wallerstein argues, such an analogy, which equatesintoxicated intent with consent in the criminal law, is at the very least controversial andpotentially misleading.92 She suggests that this is because the rationale underlying the lawon intoxication applies to acts done by an offender that lead to harm to another. The issue atstake, however, in cases such as Bree are the actions of voluntarily intoxicated victims.

To equate the victim’s consent to the offender’s intent is to extend the rationaleof the law relating to the offender’s intoxication onto the drunken victim [and]to imply that there can be no recognition of the victim’s drunkenness as negatingher consent because there is some fault in voluntarily getting drunk.93

Arguably, a woman might put herself in a vulnerable position if she chooses to getdrunk but this does not mean that she is making an indirect choice to have sex. In makingthis link between the terms intoxicated intent and consent, there are suggestions in thejudgment that when a woman chooses to get drunk, she is implicitly choosing to have sex.This reflects a worrying set of assumptions and values as I shall discuss further below.94

In contrast to the opinion expressed by the Court of Appeal and some commentators,95

I would suggest that one of the key rationales behind the judgment, the statement that“drunken consent is still consent”, is too simplistic and is problematic for several reasons.Whilst Bree established that intoxication does not necessarily deprive a person of thecapacity to consent, it does not attempt to give guidance on the point at which capacity toconsent is lost.96 As was made clear by Sir Igor Judge, the presumptions in ss. 75 and 76will not apply in these difficult cases and so the s. 74 definition is central. I would notdispute that identifying the point at which a complainant becomes incapable of consentdoes depend in part on the facts and the available evidence.97 However, I would suggest thedefinition in s. 74 requires more than this. Even when a person appears to have agreed as amatter of fact on the available evidence, what needs to be considered is whether they arecapable of agreeing and this necessitates a legal interpretation of the key issue of capacityin the case of a conscious but very drunk victim. This is because the definition of consentset out in s. 74 is clearly intended to require more than factual agreement as it includes theterms “capacity” and “freedom to consent”. It is only when all three conditions are met thatconsent in law is present. As Wallerstein argues:

The question of whether a person is capable of agreeing must therefore beunderstood as a legal question about the conditions of mental capacity underwhich the law would recognise factual consent as a basis of legal consent.98


91 S Wallerstein, “A drunken consent is still consent – or is it? A critical analysis of the law on a drunken consentto sex following Bree” (2009) 73 JCL 318–44, p. 343.

92 S Wallerstein, “A drunken consent”, n. 91 above, p. 323.93 Ibid. p. 326.94 For a fuller consideration of the arguments against conflating intent and consent in this way see ibid.95 See, for example, J Elvin, “The concept of consent under the Sexual Offences Act 2003” (2008) 72 JCL 519.96 R v Bree [2007] 2 All ER 676, para. 39.97 Rumney and Fenton, “Intoxicated consent”, n. 8 above, p. 283.98 Wallerstein, “Drunken consent”, n. 91 above, p. 321.

In Bree, whilst the court recognised in principle the “vanishing capacity to consent”,99 itdid not go on to develop this point or apply it to the facts of the case.100 Instead, the focusof the judgment in relation to the voluntarily intoxicated victim in this case was interpretedrestrictively to be a question of a lack of “actual” consent rather than lack of capacity toconsent.101 In this way, the court was able to focus on issues of proof and avoid thequestion of the need for further definition. Given that the victim in this case was, as thejudgment recognised, extremely drunk, it would therefore seem post-Bree, that the lawrequires proof of a very high degree of intoxication, almost to the point ofunconsciousness, before capacity to consent is negated. Does this really reflect the fairbalance between recognising sexual autonomy and protecting the vulnerable that the reviewwas attempting to achieve with the new definition, or should a much lower level ofintoxication be required to negate capacity to consent? Alternatively, given the difficulties inestablishing the point at which capacity is lost, should there be a default position set out ina presumption that drunken consent is not consent?102 This might be one way of tacklingthe hidden assumptions that influence so many judgments in cases of rape involvingalcohol and which informed the decision in Bree as I will now move on to discuss.

Rape myths and alcohol

In taking pains to be seen not to patronise women, it could be argued that the court placedtoo much emphasis on what might be termed “positive autonomy” at the expense ofrecognising “negative autonomy”,103 or the right to say no and have your no taken seriously.This latter emphasis may have been a consequence of the judicial hostility to further legislativeintervention but as, Finch and Munro’s studies have shown,104 lack of clear legal principlesand guidance on them can lead to juries relying on rape myths to inform their understandingand, thus, further undermine women’s claims of non-consent in particular cases.

The issue of sexual autonomy is a complex one and there are undoubtedly tensionsbetween the recognition of positive autonomy and the protection of negative autonomy.However, it could be argued that the court’s focus on positive autonomy sends out thewrong message and fails to recognise the vulnerability of victims whose choices may beimpaired by their alcohol intake.105 The argument that setting high standards for whatqualifies as consent would deprive women of their autonomy is only valid if we ignore thepowerful role of the law in setting standards and assume that sexual autonomy in all of its


99 Wallerstein, “Drunken consent”, n. 91 above, p. 321.100 However, see the later case of R v H [2007] EWCA Crim 2056 where the court did state that capacity to

consent is a legal question independent of the question of unconsciousness.101 It was noted that during the trial, the prosecution had, in the light of the complainant’s evidence, changed its

position from suggesting that the complainant was so drunk that she was unconscious to the position that shewas conscious, had only a patchy memory of events, but nevertheless did not consent. The Court of Appealin Bree suggested that this change was a move away from claims of lack of capacity to a claim of lack of actualconsent. This analysis is questionable.

102 Wallerstein argues for a default position that drunken consent is not consent. However, she seems to proposethat this should form part of the legal definition of capacity in s. 74 rather than a separate presumption ofnon-consent: Wallerstein, “Drunken consent”, n. 91 above.

103 Elliott and de Than, “The case for a rational reconstruction”, n. 6 above, p. 231. For a further discussion ofthis issue see A Wertheimer, Consent to Sexual Relations (Cambridge: CUP 2003); and Elvin, “Intoxication”, n.54 above, pp. 151–7.

104 Finch and Munro, “Juror stereotypes”, “The Sexual Offences Act”, and “Breaking boundaries”, n. 63 above.See also Rumney and Fenton, “Intoxicated consent”, n. 8 above, p. 289.

105 Throughout the judgment, stress is laid on the complainant’s voluntary consumption of alcohol. For example,see paras 25, 26, 39. This was contrasted with the presumptions which deal with complainants who areinvoluntarily at an advantage (para. 24).

aspects is a right that can be straightforwardly exercised. However, given the connectionsdrawn between women’s drinking and rape in the media,106 the political discourses and evenin the government’s own campaigns,107 it would seem that women’s “right” to drink and toconsent to sex or not when they have been drinking is far from straightforward.

It is clear from the judgment that the court implicitly accepts that alcohol is a normalelement of socio-sexual relations and it is at pains to make clear that it is not suggesting thata person cannot consent to sex when they have been drinking.108 However, in accepting thenormalisation of the connection between alcohol and sexual relations, the court fails toaddress the damage done by the myths about rape involving alcohol which have arguablybeen at the root of the problem with conviction rates. A growing body of research hasrecognised that rape convictions are particularly low in cases where alcohol is involved dueto the fact that juries are influenced by cultural discourses which can lead to stereotypicalviews of appropriate gender behaviour.109 Examples of this are the myths that women lackthe ability to directly communicate sexual desire and that they become more sexuallypromiscuous when drunk. Numerous studies have shown that women who become part ofa drinking culture, or who flirt when drunk, are considered “loose” by a proportion of thepopulation.110 From this, as Meyer has shown in relation to an analysis of a number ofmedia articles, it is a small step to equate consenting to get drunk in the company of mento consenting to sex and to holding women accountable for rapes involving alcohol.111

Thus, rape involving alcohol becomes re-presented as a problem of female drinking ratherthan male violence. As Meyer has argued, female drinking then becomes integrated into theblame culture because it is argued that it impairs the woman’s ability to provide for her ownsafety, makes her vulnerable and, thus, constitutes irresponsible and unwise behaviour.112

The language of the judgment in confirming and supporting the phrase “drunken consentis still consent” seems almost to be legitimising the practice of drunken sex and setting itup as a question of mutual responsibility.113 This notion of mutual responsibility is to someextent, as discussed earlier, consistent with the notions of free agreement which are behindthe definition in s. 74. However, in taking this view, the Court of Appeal (and the reviewthat drafted the new definition) fails to clearly address the fact that the risks of heavydrinking mostly accrue to women, as juries may interpret the behaviour of women whodrink heavily in the company of men as “asking for it”. Stating that both parties wereautonomous adults114 fails to recognise this fact and risks undermining aspects of the veryautonomy that the court claims it is at pains to protect.

Further, contrary to research showing that rape in an acquaintance situation is moreharmful in some ways than stranger rapes, because of the breach of trust involved,115 suchmyths reinforce the idea that rape involving alcohol is not serious because the victim’s

106 A Meyer, “Too drunk to say no” (2010) 10(1) Feminist Media Studies 19–34.107 See A Wollenberg, “Blaming the victim”, The Guardian, 8 July 2008, on the advice given out in an advert from

Directgov on drinking and rape, which seems to imply that if you are drunk and a victim of rape then youare to blame.

108 R v Bree [2007] 2 All ER 676, para. 25.109 For example, see Kelly et al., A Gap, n. 63 above; Finch and Munro, “Juror stereotypes”, “The Sexual Offences

Act” and “Breaking boundaries?”, n. 63 above.110 Kelly et al., A Gap, n. 63 above; Finch and Munro, “Juror stereotypes”, “The Sexual Offences Act” and

“Breaking boundaries?”, n. 63 above.111 Meyer, “Too drunk”, n. 106 above, at p. 26.112 Ibid. p. 29.113 R v Bree [2007] 2 All ER 676, paras 25 and 26.114 Ibid.115 Home Office, Setting the Boundaries, n. 10 above.


drinking was voluntary.116 This voluntariness is something that is stressed by the Court ofAppeal throughout the judgment and it makes a clear distinction between the complainant’svoluntary intoxication in this case and the presumptions which the court states are designedto deal with victims who are involuntarily at a disadvantage.

The judgment fails to appreciate, when allocating responsibility for risky behaviour, thatmen do not bear an equivalent risk and they are not expected to modify their behaviour.117

This position therefore questions women’s victim status, as they have failed to protectthemselves. It also fails to recognise that it is not simply the consumption of alcohol thatproduces vulnerability, but also the setting in which it occurs, namely men’s reactions towomen drinking.118 In this way, the court implies that rape involving alcohol becomes aproblem of female heavy drinking and not male rape. Women are seen as accountable notonly for their own behaviour in making themselves vulnerable but also for not being ableto stop any potential rapist.119 Such reasoning ignores the fact that when women (victims)are at risk, the man (offender) is the risk. It might be argued that shared responsibility inthese situations is only fair, but I would suggest that in placing the behaviour of the victimand offender on an apparently equal footing, the court is drawing a “flawed comparison ofvastly different situations as if they had the same meaning and consequences”.120 Thisproblem is compounded in the courtroom situation as the right to get drunk and consentto sex turns into the victim’s responsibility to prove her non-consent and justify her actionsbecause the burden of proof rests on her and an assessment of her evidence.121 This wasseen in Dougal, where evidence of impaired memory due to heavy intoxication on the partof the victim, rather than being seen as evidence to support her lack of capacity, was fatalto the prosecution.122

Reconsidering reform – or drinking is not a crime: rape is

Bearing in mind the problems with the judgment in Bree set out above, it is suggested thatthe addition to the legislation of a rebuttable presumption that drunken consent is notconsent in cases of heavy voluntary intoxication should be reconsidered. As was arguedabove, the end result of voluntary intoxication may put a complainant in a disadvantageoussituation similar to those already covered by the existing presumptions under s. 75. Perhapsmore importantly, the reasons given for omitting to include such a presumption – inparticular the risk of false allegations being made, are not supported by the availableresearch evidence.123 Neither are concerns that to include an evidential presumption inrelation to voluntary intoxication would impact negatively on the defendant’s right to a fairtrial.124 If a defendant genuinely misjudges a woman’s level of intoxication then, subject tos. 1 of the Act and the reasonability of his belief, he will not be convicted of rape, regardlessof the existence of the presumption. If, on the other hand, he is unsure of her level ofintoxication and suspects that it has affected her capacity to consent, then a presumption


116 Meyer, “Too drunk”, n. 106 above, p. 24.117 Ibid. p. 27.118 Ibid. p. 27.119 Ibid. p. 29.120 Ibid. p. 30121 Ibid. p. 30.122 Bree appeared willing to accept that this might not be the case but did not take the further step of suggesting

that such evidence might instead be corroborative of the victim’s lack of capacity to consent.123 Home Office, Convicting Rapists, n. 27 above, at p. 15 and Hansard (HC) 19 November 2002, col. 512.124 The application and use of the existing evidential presumptions seems to indicate that they are fairly easily

rebutted. Of course, this might be an argument against including such a presumption. However, as I argueabove, the benefits of such a presumption go beyond the scope of the individual trial.

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would be important in reminding the jury that the question to be considered is not onlywhether the complainant consented but whether the defendant was aware that she haddrunk to the level where she had lost her capacity to consent.125 Finally, as Rumney notesand as argued above, the omission of such a presumption appears to make a distinctionbetween the “deserving” and “undeserving victim”126 and, thus, feeds into precisely thekind of sexual stereotypes that the reforms to the law were supposed to challenge. As theconsultation process showed, the wording of such a presumption would be difficult for thereasons given by the Court of Appeal.127 However, in the light of the recurrent difficultywith low conviction rates, would it not be better for legislation to err on the side of cautionby including the voluntarily intoxicated and thus send out a clear message to society?128

Given the powerful role of the criminal law in reinforcing appropriate sexual behaviour, thiscould be an effective educational tool, if combined with an equally effective advertisingcampaign, which directly sought to tackle victim-blaming attitudes.129

The Court of Appeal accepted that leaving consent and capacity to the jury may permitdifferent decisions in similar cases. This is confirmed by Finch and Munro’s research, whichshows that, in the absence of further definition, mock jurors interpret capacity in differentways leading to different outcomes in similar situations.130 However, the court justifies thisby suggesting that it can be tempered by judicial direction and is in the interests ofprotecting sexual autonomy and allowing individuals to set their own limits.131 Of course,whether this is a good thing depends on whose autonomy is being protected and what typeof autonomy. The available research on the effects of alcohol on sexual behaviour andrape132 indicates that a significant number of rape victims were intoxicated at the time ofintercourse leading to the conclusion that the use of alcohol is pervasive as a tool inacquaintance rape.133 Further research indicates that there is a commonplace practice of“loosening women up” with alcohol as a precursor to making sexual advances134 and that


125 See also Wallerstein, “Drunken consent”, n. 91 above, p. 341.126 Rumney and Fenton, “Intoxicated consent”, n. 8 above, p. 288. The deserving victim would not allow herself

to get drunk and if she does get drunk then she does not deserve the protection of the law.127 R v Bree [2007] 2 All ER 676 at para 35128 Rumney and Fenton, “Intoxicated consent”, n. 8 above, p. 289.129 Temkin and Krahe, Sexual Assault, n. 4 above, pp. 109–23, suggested that the current Home Office campaign

had not been effective. However, a more recent campaign by Rape Crisis, Scotland has been evaluated muchmore positively. The “This is not an Invitation to Rape Me” campaign attempts to confront victim-blamingattitudes in a direct way using a range of images and supporting materials which invite the viewer to examinetheir attitudes to a range of situations surrounding relationships, drink, dress and levels of intimacy. The statedaim of the campaign is to support women who have been raped, assign responsibility to the (male) attackerand to challenge victim-blaming attitudes. This campaign originally ran in the USA using posters, stickers andpublic service announcements to attack the perception that when a woman is raped, she asked for, deservedor wanted it. The campaign has also been supplemented in Scotland by a TV advert entitled “Not Ever”.

130 Finch and Munro, “Breaking boundaries?” n. 63 above, p. 306; Finch and Munro, “The Sexual Offences Act”,n. 63 above.

131 R v Bree [2007] 2 All ER 676, para. 38. The court refers to the “myriad of circumstances in which the issueof consent may arise”. On this point see Gardner, “Appreciating Olugboja”, n. 87 above, p. 281.

132 HMCPSI, Report on the Joint Inspectorate into the Investigation and Prosecution of Cases involving Allegations of Rape(London: HMSO 2002); P Sturman, Report on Drug Assisted Sexual Assault (London: Home Office 2000).

133 Finch and Munro, “Intoxicated consent”, n. 63 above, at p. 779; N T Harrington and H Leitenburg,“Relationship between alcohol consumption and victim behaviours immediately preceding sexual aggressionby an acquaintance” (1994) 9 Violence and Victims 315–24.

134 D L Masher and D L Anderson, “Macho personality, sexual aggression and reactions to guided imagery ofrealistic rape” (1986) 20 Journal of Research and Personality 77–89; P Y Martin and R A Hummer, “Fraternitiesand rape on campus” in P B Bart and E G Moran (eds), Violence Against Women: The bloody footprints (California:Sage 1983); HMCPSI, Report, n. 132 above; Sturman, Report, n. 132 above.

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sexual seduction is often linked with drink spiking.135 Given that the new statutorydefinition was said to be informed by an understanding that persons engaging in sexualactivity have to understand the consequences of their acts and research has shown that suchforesight of consequences is unlikely in later stages of intoxication, is this really a matterthat could not be successfully dealt with by further legislation possibly coupled with the useof expert evidence regarding the effects of alcohol on a drunken woman’s mental capacityto consent?136 After all, one of the aims of the legislation was to inform the public aboutthe boundaries of acceptable sexual behaviour. This could be supplemented by an effectiveadvertising campaign such as the current Rape Crisis Scotland campaign and the use ofexpert evidence in relation to alcohol consumption and capacity to further educate juries.As Conaghan and others have noted, the law already recognises some situations when aperson’s ability to make important choices is significantly impaired and it has been preparedto set limits on what is acceptable in relation to the defence of intoxication for specificintent crimes, so why is this not possible in relation to intoxication and consent?137

Further, are the legal principles set out in the Act really so unproblematic, or could theybe expressed in such a way as to alleviate some of the problems raised in this type of case?Contrary to the views of the Court of Appeal, academic commentary continues to criticisethe legislative provisions as “extremely vague”.138 Following the Court of Appeal decisionin Bree, the concepts of freedom, choice and capacity continue to be left open to jurydiscretion and possible prejudice. In the interests of clarity, would it not have been betterfor the court to endorse a statutory definition of capacity that could build on some of themore positive aspects of the previous case law?139 Elvin suggests that a possible definitioncould state that the complainant does not have the capacity to consent where her knowledgeand understanding are so limited that she is not in a position to decide whether to agree.140

However, I would prefer a slightly wider definition which could more clearly encompassthose who had been drinking heavily, such as the victims in Bree, Dougal and Hagan, namelyvictims who were so drunk that they were vomiting, and possibly unable to walk unaidedand talk coherently. Admittedly, it is quite difficult to frame such a definition clearly, whichmeans, as Wallerstein notes, that there would still be a wide grey area, but ideally such adefinition should take into account that heavy drinking can distort a person’s decision-making to the extent that it negates her ability to give meaningful consent.141 This wouldmake clear to the jury that knowledge and understanding are integral to consent and wouldtake into account the negative as well as the positive aspects of sexual autonomy.

I would argue that returning to the Olugboja interpretations of consent allows the law ofrape to continue to reflect male perceptions. The judgment in Bree clearly reflects the factthat, despite reform, the law has not overcome its difficulties in distinguishing between rapeand consensual sex. By detaching consent from its broader context142 and leavingimportant issues of definition to the judge and jury, the precise myths and stereotypes that


135 CentreLGS, Response to the Office for Criminal Justice Reform’s Consultation Paper: Convicting rapists and protecting victimsof rape – justice for victims of rape (AHRC Research Centre for Law, Gender and Sexuality, July 2006),www.kent.ac.uk/clgs.

136 HMCPSI, Report, n. 132 above; Sturman, Report, n. 132 above.137 CentreLGS, Response, n. 135 above.138 Elliott and de Than, “The case for a rational reconstruction”, n. 6 above, p. 238; Temkin and Ashworth, “The

Sexual Offences Act”, n. 8 above.139 Scarman LJ in Lang (1976) 62 Cr App R 50 stated that “the critical question is . . . whether the [complainant] understood

her situation and was capable of making up her mind”.140 Elvin, “Intoxication”, n. 54 above, p. 155.141 Wallerstein, “Drunken consent”, n. 91 above, p. 332.142 For fuller arguments on the contextualisation of consent, see Lacey, Unspeakable Subjects, n. 39 above.

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the Act sought to avoid risk being reintroduced. Further, by situating consent as a matter ofproof on the facts of the individual case, the court continues to fail to appreciate thecontext in which rape takes place. Rather than encouraging a communicative model ofconsent and shifting the doctrinal boundaries of rape in the direction that the reviewintended, this return to previous principles could have the effect of undermining theexperiences of women who allege rape under such conditions as being “real” rape and failsto take the step of appreciating that sex under such conditions is very different fromconsensual sex.

The underlying rationale of the judgment would appear to be a reclaiming of judicialdiscretion in the way in which consent is put before a jury. This allows the judiciary tomaintain a strict control of the facts and themes in summing up a case. What this means inpractice is that a judge in an individual case can manipulate the discourses of consent toprivilege a particular notion of heterosexuality and to reward women who exhibit approvedcharacteristics. In this way, through its strict control of the discourses, the law will be ableto continue to police the sexuality of women and maintain the privileged position of male-centred notions of sexual intercourse at the heart of rape law. It could be argued that,despite the research which shows jurors tend to import myths and stereotypes into the juryroom and their decisions,143 in the Bree case, they got it right and that their instincts arebeing undermined by the judiciary. Experience has shown that judges are not adept atproviding scope within the discourses of rape trials for a mutuality of sexual desire orwomen’s affective experiences. Through a subtle process of gender construction, thejudgment defines and limits female experience to a social and cultural stereotype: namelythat women are inclined to lie about allegations of rape and men need protection fromwomen’s dangerous sexuality. Bree undermines the harm done to rape complainants byunwanted intercourse, subordinates the language of the Act to the common sense of thejudiciary, and reinscribes into the law the very myths and stereotypes about heterosexualrelations that the legislation was designed to undermine.

Laying the ghosts to rest?

My consideration of the reform of the law on consent would seem to indicate that, whilstthe changes in isolation may be a step in the right direction, they have had little effect ontheir own. This has led to some commentators suggesting that improvement could only beachieved if rape law moves away from a focus on consent.144 This is a matter that meritsfurther research and consideration. However, I would tentatively suggest that such a movewould not necessarily lead to a less one-dimensional understanding of sexual autonomy orrecognise the reality that consent cannot be removed from the circumstances in whichchoice is made. Instead, I would suggest that what is required is, firstly, a more generousdefinition of consent which allows a much lower level of intoxication to negate the capacityto consent and, secondly, public information campaigns aimed at displacing the genderroles, myths and stereotypes which interfere with the appraisal of specific evidence in casesand undermine the efforts of policy and legislation. To some extent this is alreadyhappening and should be encouraged.145 However, it is a shame that the government


143 Finch and Munro, “Juror stereotypes”, n. 63 above; G Chambers and A Millar, Prosecuting Sexual Assault(London: Scottish Office/HMSO 1986); Lees, Carnal Knowledge, n. 65 above; Kelly et al., A Gap, n. 63 above.

144 V Tadros, “Rape without consent” (2006) 26 Oxford J Legal Stud 515; M Madden Dempsey and J Herring,“Why sexual penetration requires justification” (2007) 27 Oxford J Legal Stud 467.

145 Home Office, Convicting Rapists, n. 27 above.

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allowed the media and the courts to undermine its recent consultation on rape.146 Theconsultation paper, like the National Consent Campaign, was not unproblematic forfeminist analyses in that it continued to place the emphasis in rape law on the regulation ofmale sexuality rather than the protection of women’s sexual autonomy. However, asConaghan and others argued in their response, the symbolic power that an evidentialpresumption could have wielded should not have been underestimated.147 One of thestated aims of the SOA was to protect the victim’s autonomy. A presumption dealing withself-induced intoxication would have been an important educative tool to indicate to juries(and the public at large) that it is the victim’s state and not the means by which it is achievedthat is important in determining the point at which consent is negated. This social andcultural role of the law is important as it is not the law in abstract but the law in its social,cultural and philosophical context that has been so effective in undermining rapecomplainants’ experiences. However, as R v Bree demonstrated, the most well-meaning lawreform is always subject to consideration and interpretation by a judiciary still not wellversed in issues of gender awareness.148 Unless and until law reform is considered in suchan inclusive manner, effective legal change remains a distant dream.


146 For an example of some of the media comment on the issue, see I Oakeshott, “Men who rape drunk womenface tougher law”, Sunday Times, 17 June 2007; J Clarke, “Men warned to check for consent before sex”, TheIndependent, 7 March 2006

147 CentreLGS, Response, n. 135 above.148 For recent research on judicial attitudes to law reform in this area, see Temkin and Krahe, Sexual Assault, n. 4

above, chs 6–7.

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The International Criminal Tribunal forthe Former Yugoslavia: paving the way for

modern international humanitarianlaw enforcement

ANDREW WOODCOCK

Cayman Islands Law School

NILQ 62(1): 119–36

Introduction

The early 1990s was a period which, arguably, saw a revitalisation of internationalism.This was met with varying degrees of success, from the liberation of Kuwait, to the

failed attempts to curb the behaviour of Somalian warlords, but importantly, did effect arevival of the peace-keeping system.1 An important corollary of the perceived need tointervene in the affairs of states in turmoil was the perception of a need to punish thosewho had caused the turmoil. Although the establishment of a post-conflict criminal tribunalwas not entirely new, there were fundamental practical and theoretical difficulties. Inmodern international law, the ground for the creation of a truly international body wasbroken with the establishment of the International Criminal Tribunal for the formerYugoslavia (the Tribunal, or ICTY), and it is from a study of the background and early daysof the Tribunal that we can see many of the difficulties – legal and political – inherent inthe establishment of an international criminal tribunal. Ultimately, however, it can be seenthat the historical lessons available to the founders were diligently applied, to produce abody which has evidenced both legal and practical effectiveness.

The period leading up to the formation of the ICTY was one involving significantregional instability – in a region historically renowned for its political volatility. A featureof that instability was that military action took place against both military and civiliantargets. Belated public awareness of these actions eventually led to an outcry and demandfor some response and, most importantly, justice for those civilians who suffered at thehands of the military. The call for a response resulted in two major steps being taken:military intervention by NATO and United Nations forces, and later, the establishment ofa judicial body to judge those individuals who conducted aggressive military action againstcivilian populations.

The decision to create an ad hoc tribunal to deal with alleged human rights abuses wasnot without discomfort both for the United Nations, and certain key states which had beeninvolved in the region: primarily France, the United States and United Kingdom.Accusations of inaction, or at least paucity of action, were levelled at all of these entitiesprior to the formation of the contemplated body.

1 See, for example, “UN peacekeeping record”, news.bbc.co.uk/2/hi/health/892592.stm; and M Lacey, “Afterfailures, UN peacekeepers get tough”, New York Times, 24 May 2005.

This paper will consider the circumstances giving rise to the establishment of the ICTY,and the criticisms which have been raised in respect to the alleged delays and inactivity. Itwill be contended that, in fact, the criticisms are somewhat unwarranted, as these states weresimply endeavouring to deal with genuine practical difficulties confronting them; these werethe same difficulties facing their predecessors after both world wars. It will also be submittedthat, ultimately, these obstacles were effectively overcome and a credible judicial body wascreated. The value of this institution lies not simply in its own contribution to justice in theregion, but in its status as a template for subsequent international humanitarian courts.

Legal background to the Tribunal

A formal recognition of the legal force of international law was the subject of somesubstantial discussion amongst theorists for a considerable period of time. The Romanconcept of ius gentium governed relations between Rome and its conquests and neighbours.Hugo Grotius developed the principles of ius gentium, and sought to systematise the law ofnations with his De Jure in Belli ac Pacis in 1625, which is considered to be the firstcomprehensive statement of the law of nations. However, even as recently as 1832, JohnAustin – one of England’s most influential legal scholars – refused to accept thatinternational law was anything more than a moral code which ought to act as a guide to thebehaviour of states.2

Austin’s twentieth-century successor and critic, H L A Hart observed that “internationallaw is at present in a stage of transition”3 towards a level of development which wouldsatisfy the positivists’ definition of what constitutes law. When that transition is complete,according to Hart, international law will be a “developed” legal system, and therefore becapable of being considered properly as law.4 Since Professor Hart propounded that idea,the institutional structure of international law has developed significantly, going wellbeyond being merely a set of moral guidelines for states.

It is therefore submitted that twentieth-century international law gained a degree offorce through its institutional structure (particularly in the form of the United Nations),such that now, in the twenty-first century, even Austin may agree that international law istrue “law”. The institutions of modern international law now give it a force of compulsionwhich would be likely to satisfy Austin’s desire for a command and sanction. This is rarelyseen more clearly in the international arena than in penalising those who breach standardsof international humanitarian law.

Antecedents of the Tribunal

It is commonly believed that the Nuremburg and Tokyo trials which followed the SecondWorld War were the first serious attempt to bring to justice those who misconductedthemselves in times of war. In fact, this is far from the case and, as early as 1815, there hadbeen moves and discussions in respect to the trial of purported war criminals. Thefounders of the Tribunal were able to learn much from the lessons offered by thesehistorical examples.5


2 J Austin, The Province of Jurisprudence Determined, Lecture V (London: Weidenfeld & Nicholson 1954), p. 187.3 H L A Hart, The Concept of Law 2nd edn (Oxford: OUP 1994), p. 236. It is important to note, however, that

this observation was first made in 1961.4 H McCoubrey, “Natural law, religion and the development of international law” in M W Janis and C Evans

(eds), Religion and International Law (The Hague: Martinus Nijhoff 1999), p. 178.5 For example, there was an unsuccessful move to prosecute leading Bonapartists after the surrender of France

in 1815; Henry Wirz, the officer commanding Fort Sumter, a confederate prisoner of war camp during theUnited States Civil War, was executed for murder, as a result of mistreatment of prisoners; and severalirregular colonial troops were executed by the British while fighting the Boer War.

At the conclusion of the First World War, the Allies required both the Turks and theGermans to try certain of their citizens for crimes committed during the course of the war.In the case of the Turks, the British sought redress against senior Turkish officials for themassacre of large numbers of Armenians throughout the war. Despite best intentions, thenational courts-martial put in place to try accused persons collapsed with very few trialscompleted, and even fewer convictions, as Turkey descended into civil war.6

By 1920, Winston Churchill, then War Minister, urged release of those prisoners heldpending trial. Even though Churchill was in favour of pressing charges against war criminals– a position which he had maintained throughout the war7 – he recognised the risk toBritish troops in holding the prisoners for trial. He therefore conceded that it was better torelease the prisoners than risk further British loss of life.8 This problem of realpolitik, in theprosecution of accused persons is an ongoing theme in the field of internationalhumanitarian law, and is certainly one faced by the Tribunal in its early days. The Tribunalrelies on the goodwill of individual states for the surrender of accused persons, and at firstthis was not forthcoming.9

The attempted prosecution of German war criminals similarly failed in the periodfollowing the First World War. The Allies required the Germans to prosecute some 900officers and men for various offences which were said to have been committed during thewar. Again, the intention was for these offences to have been heard before domestic courts-martial. In fact, there were very few cases heard, fewer convictions, and the lenient prisonsentences imposed were substantially truncated. In essence, nothing was achieved throughthese show trials.10

These early experiences highlighted two major difficulties inherently associated withestablishing a body purportedly exercising international criminal jurisdiction. These were thesame difficulties which were experienced almost 80 years later. The first is the question ofindependence. On the one hand, it is a major potential weakness of credibility for avictorious nation to establish its own tribunal, because it lacks the outward show ofindependence, as well as suffering from the appearance of an exercise in vengeance, ratherthan justice. On the other hand, to leave the prosecution in the hands of the home state issimply to invite lethargy or inaction, as the state is likely to be reticent to prosecute its own.11

The International Criminal Tribunal for the Former Yugoslavia

6 G Bass, Stay the Hand of Vengeance: The politics of war crimes tribunals (Princeton: Princeton University Press 2002),pp. 134–5.

7 Note, for example, FO383/32/45699, 17 April 1915.8 FO371/SO90/E10303, 19 July 1920.9 Report of the International Tribunal for the Prosecution of Persons Responsible for Serious Violations of International

Humanitarian Law Committed in the Territory of the Former Yugoslavia Since 1991, S/1995/728, 23 August 1995(hereafter Second Annual Report), paras 129, 189, 191.

10 “Commission on the Responsibility of the Authors of the War and on Enforcement of Penalties” (Jan–Apr1920) 4(1) American Journal of International Law 95–154. The commission found that personal liability could beimposed on accused persons, irrespective of rank. However, the commission also found that each belligerentstate could try accused persons before their own courts, whether civil or military.

11 Note, for example, the My Lai massacre in Vietnam, in which estimates of up to 500 civilians were killed byUnited States troops. Notwithstanding his conviction by a court-martial, Lt William Calley, one of theringleaders of the massacre, only ever spent four-and-a-half months in prison. More recently, the UnitedStates passed the American Service-Members’ Protection Act 2002, which: permits the US President toauthorise any means necessary for the protection of American personnel held by the ICC (s. 2008); andcontemplates the withholding of military aid to states which are a party to the court (s. 2007). Notwithstandingthat neither of these provisions has ever been acted upon, it demonstrates an unwillingness on the part of theUnited States to allow its citizens to be the subject of international criminal prosecutions.

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As will be seen, this problem has been overcome for the Tribunal in the fact that it wascreated and managed by the United Nations.12

The second major problem experienced is that of enforcement. Churchill’sacknowledgment that the capture and retention of potential defendants involved aninherent risk to British troops highlights a problem which continued to be a major issue inthe Balkans.13 In fact, it was arguably even more so, because the conflict itself was entirelyunrelated to the states expected to act as police and prison guards. This both heightened thesense of interference for the home state, as well as raising the question of why the“interfering” states were in fact becoming involved, and risking the lives of their troops.

In its First Annual Report, the ICTY noted that the Tribunal has been the subject of somecriticism because of the lack of compulsive power. Although this certainly was, and remains,a problem, there is an indirect solution available. The mechanism for securing attendance ofaccused persons is by bringing any non-compliance to the attention of the Security Council,which then has the power to take appropriate steps to assist the Tribunal.14

Some of these difficulties were addressed immediately after the Second World War, withthe formation of the Nuremburg and Tokyo Tribunals. The ICTY was the first war crimetribunal brought into existence since the end of the Second World War, after the work ofthe Nuremberg and Tokyo tribunals.15

The establishment of the Tribunal was therefore of major importance in thedevelopment of international criminal law. There had been a period of over 50 years inwhich no such tribunal had existed on the international scene, even though there was amuch higher level of internationalism than there had been during the years leading up tothe Second World War.16 Furthermore, given the substantial interval of inactivity in thisarea of law, and the likelihood of the need for future action to be taken in the field, it wasof great importance that the international community should “get it right” in theestablishment of a tribunal to deal with highly publicised infringements of human rights.

Of particular importance was ensuring that the state parties in the region wouldsufficiently trust the process of the Tribunal, such that they would refrain from takingmatters into their own hands. A stated objective of the Tribunal has always been not onlyto restore the rule of law to the region, but also restore peace. As the Tribunal itself hascommented: “One of the main aims of the Security Council was to establish a judicial process capableof dissuading the parties to the conflict from perpetrating further crimes.”17

It is submitted that the high profile media attention meant that this was not a passingproblem for which a temporary solution could be found.18


12 Report of the International Tribunal for the Prosecution of Persons Responsible for Serious Violations of InternationalHumanitarian Law Committed in the Territory of the Former Yugoslavia Since 1991, S/1994/1007, 29 August 1994(hereafter First Annual Report), para. 10.

13 In fact, it continues to be a problem today, as is demonstrated by the observations of the President of theTribunal, when he noted that one of the principal functions of the Tribunal is to encourage individual statesto exercise jurisdiction over the relevant offences. See P Robinson, “A critical assessment of the impact of theICTY on the states of the Former Yugoslavia”, address to the University of Zagreb, 12–13 June 2009,paras 2–3.

14 First Annual Report, para. 17.15 M McDougal and F Feliciano, The International Law of War: Transnational coercion and world public order (New

Haven: New Haven Press 1994), p. 704.16 Ibid. p. 706.17 First Annual Report, para. 11.18 See R Gutman, “Death camps: survivors tell of captivity, mass slaughter in Bosnia”, Newsday, 2 August 1992;

and E Sciolino, “In Bosnia, peace at any price is getting more expensive”, New York Times, 10 January 1993.

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Historical background to the Tribunal

It ought to be noted from the outset that the Tribunal was not brought into existence todeal with any single conflict. There were, in fact, three major conflicts with which theTribunal was intended to deal. These were, firstly, the brief conflict between Slovenia andthe army of Yugoslavia in 1991, although events subsequently showed that this particularengagement has given rise to the fewest investigations. The second was the war in Croatiafrom 1991 to 1995. Finally, the war which caused the greatest outrage amongst theinternational community, and led to the most vocal demand for the creation of a war crimestribunal, was the war in Bosnia from 1992 to 1995.19

In addition, the events in Kosovo in 1998 were later added as the subject of theTribunal’s jurisdiction. However, these were substantially after the creation of the Tribunal,and therefore do not figure in this paper’s consideration of the circumstances surroundingits establishment.

Importantly, the nature of each of these conflicts was, in part at least, an ethnic orracially based aggression. The corollary of this very specific underlying cause was that, inaddition to action being taken to achieve broad military objectives, the protagonists alsoengaged in substantial military action against civilian populations. The best known of theseobjectives was the so-called “ethnic cleansing”.20

The concept of ethnic cleansing is today so well publicised and well known as to bealmost trite. However, this was not the case in the early 1990s when the events were actuallyoccurring and the phrase was being coined. Ethnic cleansing has been described as:

a purposeful policy designed by one ethnic or religious group to remove byviolent and terror-inspiring means the civilian population of another ethnic orreligious group for certain geographic areas.21

The acts, which were subsequently said to be war crimes, committed in this region werenot, however, limited to ethnic cleansing. They involved the widespread killing of non-combatants, rape and the destruction of civilian property.22

Although it is today generally accepted that the preponderance of the misconduct wascarried out by the Serb forces, military action against civilian populations was one of theprimary causes for concern in the region, and that conduct was carried out by all parties.23

Therefore, the issue of culpability for atrocities committed was not one which couldobviously and easily be ascribed exclusively to any one protagonist. This is a point of someinterest in respect to the formation of the Tribunal, because it directly impacted upon itscredibility, in that it was not a “victors’ court” in the sense of the earlier ad hoc tribunals.

In the months following the close of the Second World War, the culpability for causingthe war, and subsequent actions during the war, was clear. That was not the case with theBalkans conflicts. There was therefore a high level of credibility to be derived from theestablishment of a non-partisan body by an international umbrella organisation, designedto take punitive action against all those who committed international humanitarian crimes,rather than one side of the political conflict. Therefore, the fact the ICTY was not an entity


19 E Sciolino, “US names figures it wants charged with war crimes”, New York Times, 17 December 1992.20 A Roberts and R Guelff, Documents on the Laws of War (Oxford: OUP 2002), p. 565.21 Report of the Commission of Experts Established Pursuant to the United Nations Security Council Resolution 780 (1992),

S/1994/674, 27 May 1994, para. 130.22 Article 4(2) of the ICTY statute prohibits this conduct by including it within the scope of the definition of

genocide, and Article 2(d) prohibits the destruction of property as one of the “grave breaches of the GenevaConventions of 1949”.

23 S Ricchiardi, “Exposing genocide . . . for what?” (June 1992) American Journalism Review.

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whose sole raison d’être was to punish a losing protagonist added significantly to its value asan independent judicial entity.

Even in the absence of public knowledge of and reaction to these measures, the conflicthad already given rise to a determination by the Security Council in September 1991 thatthe fighting in the region amounted to a threat to international peace and security.24 Thisallowed the United Nations to take action under chapter VII of its charter, in the form ofthe imposition of an embargo on the delivery of weapons and other military goods toYugoslavia. Most importantly, it also allowed the Security Council to create an organ underArticle 29 of the charter to give effect to its resolutions.25

The news of the extent of the atrocities occurring in the region first broke in the UnitedStates media in July/August 1992.26 As public awareness grew, there was an increasing levelof pressure from human rights groups imposed on the principal Security Council nations,as well as the United Nations itself, to take actions to redress the problems in the Balkans.These events subsequently led to a further resolution by the Security Council on 6 October1992 for the appointment of a Commission of Experts to investigate the allegations madein the media.27 That Commission of Experts delivered its report on 10 February 1993. Thereport confirmed the factual allegations which had already been widely publicised in theworld media.28

Relying on the recommendations made in this interim report, the Security Counciladopted Resolution 808 on 22 February 1993, by which it accepted that a Tribunal ought tobe established to investigate, indict and hear charges relating to violations of internationallaw. In order to give effect to this resolution, the Security Council subsequently passedResolution 827 on 25 May 1993, by which the Tribunal was actually established, and theStatute of the Tribunal was adopted.

Criticisms of the early days of the Tribunal

There has been a lot of criticism of both the time it took to establish the Tribunal, andsubsequently for the Tribunal itself to take any action to give effect to its mandate. It hasbeen suggested that this was not an important political issue for the Bush administration atthe time, and any action which was going to occur was only likely in response to publicpressure.29 This is, of course, what happened when it became apparent that there wereevents such as ethnic cleansing and genocide taking place in an area for which the UnitedStates was already partially responsible, through its participation in NATO (North AtlanticTreaty Organisation). It was therefore necessary for groups interested in human rights toexert pressure to make the issue sufficiently political for action to be taken in the Balkans.30

The Balkans was not the major consideration for the Bush administration. By the timethese events came to the public eye, the First Gulf War had been over for only a short time,


24 Resolution 713, 25 September 1991. The resolution also called on the parties in the region to refrain fromtheir continued breaches of a cease-fire agreement.

25 Article 29 provides that: “The Security Council may establish such subsidiary organs as it deems necessary forthe performance of its function.”

26 The story was originally brought to light by Newsday journalist Roy Gutman in a series of articles from 19 July1992: “Prisoners of Serbia’s war”, Newsday, 19 July 1992; “Like Auschwitz”, Newsday, 21 July 1992; and“Bosnia’s camps of death”, Newsday, 2 August 1992.

27 Resolution 780 (1992).28 See, in particular, Report of the Secretary-General on the Activities of the International Conference on the Former Yugoslavia

(S/25221), 2 February 1993, Annex I, paras 1–4.29 B Magas and I Zanic (eds), The War in Croatia and Bosnia-Herzegovina 1991–1995 (London: Frank Cass), p. 273.30 Interim Report of the Commission of Experts Established Pursuant to the United Nations Security Council Resolution 780

(1992) S/25274, 10 February 1993, paras 5–7.

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and threats were being made by the United States and British governments to bring SaddamHussein before a war crimes tribunal, albeit that such threats were relatively abstract. At apress conference on 1 March 1991, President Bush refused to rule out the possibility of aprosecution of Saddam Hussein.31

The benefit for the United States and United Kingdom in bringing that tribunal intoexistence would have been twofold: firstly, the war was over and there would have been nopolitical complications in creating such a body; and, secondly, given that the war was overand won, there would have been minimal risk to British and American troops in givingeffect to the determinations of such a tribunal. There was substantial discussion in themedia of the possibility of pursuing such a course. Ultimately, it even became a significantelectoral issue in the 1992 US presidential election. However, whether it was because ofsimple lethargy, or a desire to be free of any further involvement in the territory, or eventhat it was no longer politically expedient to do so, neither Hussein nor any of hislieutenants were brought before any court to answer for their actions until many years later.

Bass, in his very useful account of war crime trials throughout history, argues that it wasa lack of political will on the part of the new US President, Bill Clinton, which resulted ina degree of sluggishness in response to the problems in the Balkans. In particular, Bass citesthe President’s concerns about committing troops to the region.32 However, this critique ofthe alleged realpolitik of the new American leader is contradicted by the significant materialcontribution made to the establishment of the Tribunal by the United States. In addition tomaking the largest single voluntary financial contribution to the Tribunal, the United Statesalso provided 22 professional staff on secondment.33

It is submitted that, in promoting the Tribunal, the United States administration musthave been aware that it was creating an institution which would require “police” services. Ifthe political will were entirely lacking, as Bass suggests, the United States would not havemade a material contribution which effectively ensured the survival of the Tribunal. It iscertainly accepted that there was a potential political backlash for the new President incommitting troops to a foreign conflict. However, the Democrats had made so much of thefailure by the Bush administration to prosecute Saddam Hussein that for Clinton to fail toact in the first months of his presidency would have been just as damaging politically.34

Both Britain and France have been subject to particular criticism. This was both in thelead-up to the establishment of the Tribunal, as well as in its immediate aftermath. Britainhas been accused of providing virtually no assistance in the creation of the Tribunal; givingno money towards its initial funding; and providing only one staff member. This is incontrast to the United States, whose initial contribution was of substantial funds and theprovision of some 20 of the Tribunal’s initial 60 staff. This latter point did, however, leadto a criticism that the Tribunal was dominated by an “American mafia”. This would appear,however, to be a somewhat unfair criticism, given the fact that no other members of theUnited Nations seemed willing to be quite so forthcoming in support of the Tribunal.

The French were subject to substantially the same criticism as that levelled against theUK. Both were accused of “foot dragging” in the lead up to the formation of the


31 “After the war: the White House; excerpts from Bush’s news conference on post-war plans”, New York Times,2 March 1991.

32 Bass, Stay the Hand, n. 6 above, pp. 214–15.33 First Annual Report, para. 186.34 See a series of articles by the New York Times’ Elaine Sciolino: “The 1992 campaign; Bush’s greatest glory

fades as questions on Iraq persist”, 27 June 1992; “US is said to withhold evidence of war crimes committedby Iraq”, 6 July 1992; and “Iraq policy still bedevils Bush as congress asks: were crimes committed?”,8 August 1992.

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Tribunal. As with the British, France contributed very little funding, and failed tocontribute any staff at all.35

One important explanation for the delay by the British and French governments is theirhistorical experience of the Balkans. The region has long been considered to be a problemfor European troops. Historically, it has proven to be one of highly complicated politicalrelationships, and it has been very easy for troops to become embroiled, at great cost to anation in financial and human terms, without any apparent result, or ease of withdrawal.36

In these terms, resisting involvement in foreign and unrelated conflict is, to a large extent,understandable. The concerns expressed by Churchill in 1920 were no less relevant andapplicable in 1993.37

It would appear to be the case that until the full extent of the problem began to beknown in the West, the mere existence of a local conflict was not sufficiently shocking forsubstantial pressure to be brought to bear on governments.38 In this respect, contrast theend of the Second World War, at which time the full extent of the Nazi activities becameknown and there was an immediate call for action. In those circumstances, there was botha personal aspect, in that Germany was in fact the enemy, as well as a growing awareness ofthe scale of the misconduct. At the early stages of the Balkan conflicts, there was simplynot this level of public awareness and, therefore, the task was left to the media and humanrights groups to bring the matter to the attention of states, and to the public, who wouldthen apply the necessary political pressure to governments.

However, this response to the issue seems, with respect, a little simplistic and self-serving. The issue of national self-interest ought not be forgotten. Humankind is inherentlyself-interested, even in its international relations, although that self-interest must necessarilybe tempered by the need to live harmoniously as a community of nations.39 In the periodfollowing the Second World War, there was an obvious motivation for prosecuting thevanquished: the desire to wreak vengeance on those who had plunged the world intoconflict for the second time in 30 years.

No such personal motivation was at work on the United States, Britain or France in1993. In fact, the negative political consequence was a factor actively working against thosestates contributing to establishing a war crimes tribunal. It is the function of the law, andthe law-makers, to encourage people to overcome their naturally selfish tendencies.40 Thus,the delay on the part of these states is entirely understandable. Perhaps most importantly,when reminded of their duties within the international sphere, they ultimately acted andfulfilled their responsibilities as members of the international community.

However, there is a counterpoint to this proposition. Even in the days prior to theestablishment of the Tribunal, the United States sought to effect a peace settlement whichwould have potentially obviated the need to commit troops.41 Given the natural humantendency towards self-preservation, it was considered highly unlikely that a peacefulresolution could be reached if there were a serious possibility of legal culpability for warcrimes being directed at one or more of the parties involved. Furthermore, Slobodan


35 First Annual Report, paras. 184–6. Notably, this carried on into the second year of the Tribunal, althoughBritain and the United States continued to make material contribution.

36 G Campbell, The Road to Kosovo: A Balkan diary (Boulder: Westview Press 1999), p. 116.37 See n. 8 above.38 Bass, Stay the Hand, n. 6 above, p. 211.39 This is the basis on which Hugo Grotius proceeded in De iure Belli ac Pacis, Prol., paras 8 and 10.40 Aristotle, Nichomachean Ethics, Bk 7.41 J F Burns, “Balkan war trials in serious doubt”, New York Times, 26 April 1993.

Milosevic, in a letter from the Prime Minister of Yugoslavia to the Secretary General of theUnited Nations, made it clear that the establishment of any tribunal was yet anotherexample of the victimisation of Serbia.42 It has therefore been suggested that only bykeeping a morally neutral tone to matters relating to this conflict could this peacefulresolution be successfully brought about.43

The corollary of that suggestion is that the morally neutral aspect was easier to achievefor the British and French, whose troops were present in the region at the time, and wereless partisan in favour of any faction (particularly the Bosnians). Britain and France weremore likely to see all parties involved in the dispute as being equally culpable, and therefore,the necessity to institute a tribunal was not as pressing at that time as there was no obviousneed to redress a significant injustice.

In addition to this fear was the simple practical fact that no judicial body could have beenestablished in this region without troops to give it effect, both in terms of arresting potentialdefendants and enforcing its determinations. It was acknowledged that simply establishing ajudicial entity would not be sufficient. A military element was a necessary accompanimentto the establishment of the Tribunal. In order to arrest, try and perhaps even give effect tothe decisions of the Tribunal, the use of force against potential defendants was always adistinct possibility. In the absence of any United Nations police force, responsibility for thismilitary action would lie with the nations whose troops were present in the region. Thispossible need to commit further troops gave rise to a degree of French and Britishresistance to the idea of setting up a Tribunal, with the knowledge that its establishmentcould result in the deaths of their troops. There were, therefore, immediate andunderstandable reasons – based on hard historical experience – to explain the British andFrench resistance to becoming involved in the creation of a war crimes tribunal.

There were similar practical, politically based, reasons for the reluctance of the UnitedStates to act. In the context of the domestic political landscape of the United States, theseevents were occurring within the early months of the Clinton presidency. It was obviouslyimportant to any administration not to place United States troops in a position of potentialdanger. The resistance to action at this early stage was therefore explicable from theperspective of US internal politics.

On the same line of reasoning, yet perhaps adopting a more cynical approach, is thecriticism that the major powers – the United States, Britain and France – had a desire tomaintain the status quo.44 For the United States, this was a means of avoiding any risk toits troops by committing them to an unstable region. For France and the UK, thepreservation of the status quo essentially meant preserving their respective positions withinthe European balance of power, by neither weakening their own military power, nor bypropping up any new military force on the European stage.45 Balanced against this politicaldesire were the legal obligations associated with membership of the European Community.In a statement made on 1 February 1993, the European Community confirmed its supportfor the peace process in the Balkans. In particular, in reference to the United Nations’measures to secure peace, it was said: “The European Community and its Member Statesare prepared to contribute actively to this end.”46

The International Criminal Tribunal for the Former Yugoslavia 127

42 UN Doc. S/25801, 19 May 1993.43 Magas and Zanic, The War in Croatia and Bosnia-Herzegovina, n. 29 above, p. 274.44 Ibid.45 Ibid. p. 275.46 Report of the Secretary-General, n. 28 above, para. 20.

This argument would have it that these powers wanted to contain the conflict and let itburn itself out.47 They were prepared to maintain a watch on the conflict, ensuring that itdid not spill beyond its original borders, but not themselves become sufficiently involved tobring the conflict to an end. In purely domestic political terms, such an approach is highlybeneficial to the major powers – and probably more importantly, to the governments of theday, by ensuring that no lives are lost as a result of involvement in another nation’s civil war.Of course, the failing of this policy is that it does not take into account the human cost.This safe course would appear to be the one which was initially taken. However, subsequentevents overtook the major powers, and their own internal political forces, driven by publicopinion, shifted, and forced them to act. In particular, the Tribunal has noted the fact that,in its first year, there were over 600 media articles published throughout the world, and therewas a strong element of disapproval for not having achieved more.48

Although Britain, France and the United States were the major international players inthe region in the early 1990s, there were also other states involved at the time (at the veryleast at the level of the Security Council), and they too appeared to be reluctant to see theestablishment of the Tribunal; if not in express terms, at least in terms of a failure to act.These were nations which broadly come into the category of those with a dubious historyof human rights of their own, including, for example, Russia49 and China.50 Naturally, suchstates were resistant to the idea of a precedent being set through the establishment of a“modern” tribunal addressing breaches of international human rights law.51

The Tribunal was created at a time when an International Criminal Court (ICC) was alsocontemplated, but before it had come into existence. There is scope for a strong argumentthat both China and Russia, in light of their less than unblemished human rights records,52

were, naturally, both reluctant to assist in establishing precedent in the internationalcommunity for the prosecution of breaches of humanitarian law. However, any attempt atactive resistance would have been transparent and almost certainly would have resulted innegative international press, in the same way that the United States’ resistance to the ICCgarnered negative response.53 Therefore, in a similar response to that of France and Britain,there was simply a failure on the part of these states to take any active steps in support, and,given that the backing of the leading nations involved in the region was essential to theformation of the Tribunal, this failure effectively acted as a de facto discouragement.

Similarly, the United Nations itself was the subject of criticism for its failure to takepositive action immediately upon the circumstances surrounding the conflict becomingknown in the public forum. These criticisms included an allegation of substantial under-funding, in view of the purpose the Tribunal was intended to serve. As an illustration of thispoint, the initial half-year budget of the Tribunal was $5.4 million, whereas the 2009 budgetwas $290 million.54 The limitations and impermanence of initial funding caused theTribunal substantial difficulty and inconvenience in its early days, in the most basic areas of


47 Bass, Stay the Hand, n. 6 above, p. 212.48 Second Annual Report, para. 164ff.49 Noting Russia’s involvement in Chechnya and bearing in mind its own relatively recent invasion of Georgia.50 Also noting China’s involvement in Tibet.51 It is also interesting to note that, to this day, Russia, China and the United States have still not become parties

to the Treaty of Rome, which institutes the ICC.52 Note Human Rights Watch, Violations of Humanitarian Law and Human Rights in the Georgia–South Ossetia Conflict,

1 April 1992; Human Rights Watch, Human Rights Watch World Report 1998, 3 December 1997.53 Human Rights Watch, United States Efforts to Undermine the International Criminal Court; Article 98 Agreements,

2 August 2002.54 Report of the International Tribunal for the Prosecution of Persons Responsible for Serious Violations of International

Humanitarian Law Committed in the Territory of the Former Yugoslavia Since 1991, S/2010/413, 30 July 2010, para. 94.

obtaining premises and appointing a chief prosecutor.55 Arguably, this clear disparitybetween the practical necessity and the initial budget is attributable not so much to adeliberate attempt to detract from the effectiveness of the Tribunal as a misunderstandingof the depth of the problem, and the extent of the needs of the Tribunal. This is supportedby the proposition that once the decision was taken to establish the Tribunal, the partiesinvolved were committed to its success. The success or failure of the Tribunal directlyreflected upon them. Therefore, it could be said that the failure to ensure adequate resourcesin terms of staffing was a reflection of ignorance of the full scope of the problem, ratherthan any more sinister attempt to defeat the purpose of the Tribunal. Ultimately, thisargument is borne out by the subsequent substantial increase in funding and resources.

Structure of the statute of the Tribunal

The statute of the Tribunal was adopted by resolution of the Security Council on 22 May1993.56 The statute establishes the jurisdiction of the Tribunal, both in temporal andterritorial terms. Article 1 of the statute provides that the Tribunal has jurisdiction to hearmatters arising out of the territory of the former Yugoslavia from 1991 onwards.Importantly, this article refers generally to the prosecution of any person who hascommitted a relevant offence. In contrast, the Charter of the International Military Tribunalat Nuremberg referred specifically to the prosecution of the “major war criminals of theEuropean Axis”.57

Article 2 defines the legal jurisdiction of the Tribunal, which is to hear matters inrelation to grave breaches of the Geneva Conventions of 1949. These are described withsome specificity within the statute (although, notably, with less detail than is to be found inArticle 8 of the Rome Treaty), and include such matters as unlawful deportation. Similarly,Articles 3 to 5 deal with violations of the customs of war, genocide and crimes againsthumanity respectively. Each area of criminality is defined and described in some detail.Again, this is in contrast with the Charter of the Nuremberg tribunal, which describes therelevant offences in general, inclusive terms.58

In contrast with other international judicial bodies, such as the International Court ofJustice (ICJ), the Tribunal, through Article 6, has power to deal with natural persons, asopposed to being limited to dealing with states, or entities with an internationalpersonality.59 Article 7 goes on to impose liability on natural persons who not only committhe offences referred to within the statute, but also on those who plan, instigate, order orabet the offences. This latter provision is in order to give effect to an earlier Security Councilresolution to the effect that individuals who commit offences of this nature are to be heldpersonally liable for their conduct.60

It is interesting to note at this point that there is no need under either the SecurityCouncil resolution, or the statute itself, that there be any submission to the jurisdiction ofthe Tribunal. This is in sharp contrast to both the ICC and the ICJ, both of which requirethe member state to accede to the jurisdiction of the court before it is entitled to hearmatters before it.61 To this extent, the Tribunal’s compulsory, albeit limited – jurisdiction


55 First Annual Report, paras 28–51.56 Resolution 808.57 Charter of the International Military Tribunal at Nuremberg, Article 6.58 Article 6.59 Such as the International Committee of the Red Cross.60 Resolution 764.61 Note Articles 12 and 36 of the statutes of the respective courts, although submission to the ICJ is effectively

deemed as a consequence of membership of the United Nations.

is much closer to that of the Tokyo and Nuremberg tribunals, for which there was nonecessity to submit to the jurisdiction. This is also the reason that the armed forces ofindependent nations were required to assist the Tribunal, and bring accused persons beforeit: the home states of the accused persons did not necessarily consent to their citizensbeing charged.

Once again, this is an illustration of the manner in which the founders of the Tribunalbenefited from the historical lessons available to them, and produced an entity whichamounted to a pragmatically effective institution, while still an appropriate legalcompromise. Given the nature of the accusations being made by all parties involved in thevarious conflicts, it is almost certain that no state involved would have been willing toconsent to the jurisdiction of the Tribunal. Thus, the Tribunal would have been ineffective,or at least substantially less effective. Therefore, the imposition of a compulsory jurisdictionby an independent entity (the United Nations) has the effect of ensuring that a practicalresult is achieved, while justice is also served.

Article 9 recognises a concurrent jurisdiction between the Tribunal and domestic courts.However, it goes on to provide in Article 9(2) that, where there is such concurrency, theTribunal has primacy. Therefore, from a procedural standpoint, an accused person oughtnot be brought before two bodies for the same offence. However, the potential weaknessof this provision is that it relies upon the goodwill of the national courts for its efficacy.Similarly, Article 10 states that a person shall not be charged before a domestic court for amatter already dealt with before the Tribunal – effectively incorporating a double jeopardyprotection for potential defendants.

These latter provisions are clearly essential for the effective administration of justice,and, perhaps more importantly, the transparent appearance of justice. The argument hasbeen made that a potential danger inherent in the concept of universal jurisdiction is thepossible political motivation of prospective prosecutors in determining whether or not tobring matters before local courts.62 For this reason, granting primacy to a court exercisingan international jurisdiction, established by an independent arbiter, and constituted by aninternational bench protects the rights and interests of the individuals who may bebrought before it.

Contrast with the Nuremberg and Tokyo tribunals

While considering the statute of the Tribunal, it is perhaps of interest to note the extent towhich the Tribunal was different from the earlier ad hoc tribunals established in Nurembergand Tokyo after the Second World War. Clearly, there were lessons learned from theestablishment and conduct of those bodies which, if not directly applied, were at leastunderstood when the Tribunal was being founded.63 For that reason, it is interesting toexamine the areas in which there is divergence, and note what may have been considered tobe the failure of the earlier entities, and the improvements in the later one.

Firstly, and perhaps most importantly, is the fact that the Tribunal is a body of a trulyinternational nature. The 11 judges and the prosecutor of the Tribunal were selected frommember states of the United Nations, which gave a potential body of almost 200 nationsfrom which these officials could be selected. This is in direct contrast with the four nations– Russia, France, United Kingdom and the United States – from which the prosecutors and


62 Throughout the First Annual Report, substantial commentary is made on the divergences between the ICTYand its predecessors. However, clearly, those early lessons informed the formation and structure of theTribunal.

63 Roberts and Guelff, Documents, n. 20 above, p. 567.

judges were selected for the Tokyo and Nuremberg tribunals.64 The post-Second World Wartribunals can, therefore, be subject to the criticism of being little more than vengeancetribunals, in which the victors sought to exact retribution, rather than justice.

This latter proposition is one which goes to the question of the total effectiveness ofthe body, which is a feature which cannot be understated. For any judicial entity, itseffectiveness is, to a very large extent, reliant upon the perception held by the public, andmost importantly by those appearing before it. The fact that the Nuremberg and Tokyotribunals were established by the four leading victorious nations of the war was a featurewhich detracted substantially from their credibility, because it reflected the limitedperspective of the small number of legal systems from which the key players could bedrawn. Furthermore, the Charter of the International Military Tribunal at Nurembergexpressly excluded challenge to the membership of the panel.65

This leads to the second divergent feature of the Tribunal, which was that it wasestablished by an independent umpire during the conflict, and therefore covered both actualand prospective criminal offences.66 The Tribunal therefore reflected an attempt toconstitute both a body hearing trials of matters which had already occurred, as well as toamount to a deterrent for future misconduct. The extent to which this was successful willbe considered further below.

Under the statute of the Tribunal, rape is expressly included as a crime againsthumanity.67 Similarly, genocide is also expressly included as an offence capable of beingtried by the Tribunal.68 These are offences which were included within the GenevaConventions of 1949.69 Those conventions were adopted with the benefit of hindsightafter the atrocities identified during and after the Second World War. The experience fromthe earlier bodies was of assistance to the founders of the Tribunal, in that there was acorpus of established crimes, which were recognised as being offensive to international lawand were engrossed into the statute as part of its jurisdiction.

Nevertheless, the Tribunal’s scope was slightly less expansive that that of the post-warentities. The post-war ad hoc tribunals tried the relatively nebulous offence of “crimesagainst peace”.70 The rationale at the time was that all resort to war is unlawful. Therefore,Germany, as the aggressor in the war, committed a crime against the preservation of peace.The jurisdiction of the Tribunal is exclusively defined by the statute, and there is noreference to any offence of the nature of “crimes against peace”.71 This could be said tobe a return to the post-World War One position which rejected the prospect of criminalliability for acts of aggression.72

There are two possible explanations for this limitation on the jurisdiction of theTribunal. The first is that, although the Serbs were arguably the more aggressive party


64 See Article 1 of the Charter of the International Military Tribunal at Nuremberg.65 Article 3.66 As opposed to the Nuremberg tribunal being established by the Agreement for the Prosecution and

Punishment of the Major War Criminals of the European Axis (London Agreement), 8 August 1945.67 Article 4.68 Article 5.69 McDougal and Feliciano, International Law of War, n. 15 above, p. 706; however, Article 2 also deals with “grave

breaches” of the Geneva Conventions of 1949.70 R Jackson, Report of Robert H Jackson, United States Representative to the International Conference on Military Trials:

London, 1945, 25 July 1945 (Washington: USGPO 1949), pp. 381–4.71 The scope of the Tribunal’s jurisdiction is exhaustively established in Articles 2 to 5. There is no mention in

any of those articles to any reference approaching “crimes against peace”, or “crimes of aggression”.72 “Commission on the Responsibility of the Authors of the War”, n. 10 above, p. 119.

involved in the various conflicts, there was no clear and obvious aggressor initiating thedisputes. This is in contrast with the Second World War, in which it was universally acceptedthat Germany and Japan were the initiators of the conflict. Although history does tend tobear out this point, it was not even an issue at the time. It was simply presumed.

The second possible explanation can be based around the individual responsibilityaspect of the Tribunal’s function. The primary purpose of the Tribunal was to bring tojustice individuals who had committed specific offences, and hold them responsible fortheir actions. The concept of a crime against peace is one which is viewed on a higher scale,in that it is directed more at the state’s conduct, rather than at that of the individual. Forthat reason, the offences which are specifically included in the statute of the Tribunal moreadequately satisfy the Tribunal’s function of bringing individuals to justice for theirmisconduct. Other tribunals exist to bring states to justice for their misdeeds.73

Procedure

Unlike the Tokyo and Nuremberg tribunals, the ICTY had a clearly defined procedure fromthe outset, embodied in the statute itself. Importantly, this procedure was arrived at after anextensive period of consultation with jurists from a wide variety of jurisdictions.74 It wasintended that the procedure adopted by the Tribunal should take account as much aspossible of domestic principles in both the continental European system as well as theWestminster tradition. This is reflected in Article 15 of the statute in which the rules ofprocedure and evidence are to be found.

In divergence from the rules of the Tokyo and Nuremberg tribunals, no death penaltyis available to the judges of the Tribunal.75 This is reflective of the United Nations’ generalmove away from the imposition of the death penalty and is consistent with suchinternational instruments as the Universal Declaration of Human Rights and theInternational Convention on Civil and Political Rights.76 This does, however, raise twoimportant and interesting practical questions for consideration.

The first is in relation to accommodation of convicted prisoners. If the maximumsentences which could be imposed under the statute are terms of imprisonment, then theremust be appropriate accommodation for the prisoners serving those sentences. To date, thishas been provided by the Netherlands, which has devoted a portion of one of its prisonsto United Nations prisoners. The second point is that, under Yugoslav law, the death penaltyis available for many of the offences which are within the Tribunal’s purview. However, itis again reflective of the primacy of the Tribunal’s jurisdiction that this is nevertheless notadopted by the Tribunal in its sentencing protocols.

Finally, under the Tribunal, there is an appeals process available to hear bothinterlocutory procedural matters and substantive appeals from both conviction andsentence.77 This is once again a substantial divergence from the operations of the earlier


73 Such as the ICJ and the International Human Rights Commission, although neither of those bodies exercisea criminal jurisdiction per se.

74 In contrast, a very simple procedure is set out in Article 24 of the Nuremberg Charter. The simplicity of thisprocedure would appear to reflect the inexperience of its draftspeople with the production of rules ofinternational tribunals.

75 Article 27 of the Charter of the International Military Tribunal permits the imposition of the death penalty.76 As an aside, it is also interesting to note that this is what would have prevented Iraq, or the United States, from

executing Saddam Hussein, and it was therefore necessary for a court exercising domestic jurisdiction to passsentence of death against him.

77 Article 25 of the statute of the Tribunal.

tribunals, whose determinations were final, with no avenue of appeal available.78 Again, thisadds to the credibility of the Tribunal as a body exercising judicial power, rather than simplyan instrument of vengeance.

Limitations of the Tribunal

Notwithstanding these theoretical benefits available to the Tribunal from the source of itslegal power, there have been a number of practical limitations, some of which have beencanvassed already. These limitations have detracted substantially from the capacity of theTribunal to operate effectively as a body exercising judicial power.

Perhaps the most important is in respect to bringing accused persons before theTribunal. This was one of the more difficult features of the Tribunal’s operations in its earlydays. In 1996 and 1997, there was substantial criticism levelled against NATO and UnitedNations troops for a failure to bring persons under indictment before the Tribunal. This wasoften the case when it was, in fact, known where those persons were. One commentator hasnoted that various indictees were known to NATO forces, and sometimes even socialisedat the same venues as those forces, but were not arrested.79

It has been suggested, from the perspective of the United States, that there were twomajor reasons for this failure to take any real steps towards the arrest of accused persons.The first is the recent memory of the Somalia debacle, in which a number of United Statesmilitary personnel were killed or injured in an attempt to bring local warlords to justice,ultimately achieving little benefit for the local populace. The risk of involvement of troopsin a similar situation was acknowledged, and obviously there was a hope to avoid loss of lifewith the same apparent lack of result. In the same vein was the fact that it was recognisedfrom public surveys that as many as 70 per cent of the United States population wereopposed to the commitment of their troops in Bosnia.80 An increase in the commitmentof troops to the region is almost certainly what would have been required to effect thearrest of a large number of those persons under indictment from the Tribunal.

The other major failing of the Tribunal in its early stages was that generally it was onlylow and middle-level personnel who were indicted and brought before it. At least in theearly days, there was no attempt made to indict senior officers or politicians from either sideof the engagements. (This has, of course, subsequently been changed, with the mostnotable being the indictment and trial of Milosevic: that was considered to be a major stepforward in the life of the Tribunal.)

It has been suggested that this failing was a symptom of the fact that the Tribunal wasattempting to deal with matters in the course of an ongoing conflict. The argument whichhas been used to justify the failure to take action against senior officials is that there wereattempts underway to broker peace with those senior officials.81 It would have substantiallydetracted from the capacity of the United Nations to achieve this end of a brokered peaceif it were known that, as soon as the peace were achieved, those involved at the highest levelwould be indicted for serious offences, involving potentially lengthy prison sentences.

There is some validity to this argument, in theory. It is difficult to envision acircumstance in which a senior politician would be prepared to bring an end to a conflict ifit were known that such an act would expose him or her to a charge of crimes against

78 Article 26 of the Charter of the International Military Tribunal provides that: “The judgment of the Tribunal. . . shall be final and not subject to review.”

79 Campbell, Road to Kosovo, n. 36 above, pp. 113–14.80 Ibid. p. 116.81 Ibid.


humanity. However, whether that theoretical argument can be transposed into reality, giventhe relatively limited number of senior personnel who have been charged even to this dayis somewhat questionable. Conversely, it may be said that, by charging a large number oflow and mid-level personnel, and securing convictions, the Tribunal is at least ostensiblyjustifying its existence.

Nevertheless, this does raise an interesting issue, which should be considered. That is,whether there is any basis for the suggestion that a tribunal of this nature should only beformed at the conclusion of a conflict, rather than during the course of that conflict. Onthe side of favouring such a tribunal at the earliest point is that it allows the tribunal to avoidaccusations of being created solely for the purpose of retributive justice. This is, of course,the accusation which was levelled regularly against the Nuremberg and Tokyo institutions.82

It was one from which they suffered substantially and – in light of other evidence, such asit being a “victor’s court” – is quite a reasonable accusation. As a result, those tribunalsexperienced loss of prestige and acceptability as bodies exercising appropriate jurisdiction.Therefore, there is a case for the tribunal to be established at the earliest time.

However, the contrary argument also carries significant weight. That is that the creationof an entity of this nature during the course of the conflict does little more than complicatethe political situation. That is borne out in the present case, in the argument referred toabove that the capacity to bring about a negotiated settlement was complicated by thespectre of criminal charges potentially looming against those with whom the United Nationswas negotiating. Similarly, there would appear to be little or no evidence to suggest that theformation of the Tribunal did anything to curtail the very conduct which it was establishedto investigate. This would therefore suggest that entities of this nature are left with littlemore than retributive justice, if they cannot be said to fulfil any prophylactic purpose.

The Tribunal versus the ICC

It is to be noted that it is only relatively recently that the Statute of Rome, by which the ICCis brought into existence, has come into effect. That is there have now been the requisitenumber of ratifications for the statute to come into force and for the court to be created.Some thought must therefore be given to the issue of whether, and if so to what extent,this court will oust ad hoc entities such as the Tribunal.

Part 2 of the Statute of Rome sets out the jurisdiction of the ICC. Most relevantly,Article 5(1) states that the “jurisdiction of the Court shall be limited to the most seriouscrimes of concern to the international community as a whole”. This is important to thepresent context, in that it then goes on to include genocide, war crimes, crimes againsthumanity and crimes of aggression in that category of serious crime. These terms are moreclearly defined and delineated throughout the rest of Part 2 of the statute. The offences aredefined in much more detail than in the statute of the Tribunal. However, the point ofArticle 5 is that, on the face of it, the ICC will not entirely obviate the need for ad hocbodies such as the Tribunal.

The Tribunal’s jurisdiction is not limited to “serious” offences “of concern to theinternational community as a whole”. Its purpose is to try breaches of the GenevaConventions of 1949, albeit that it limits that jurisdiction to “grave” breaches of thoseconventions. Nevertheless, a consideration of the scope of the jurisdiction of the Tribunalshows that the level of seriousness of the offences with which it is concerned is not as


82 H Fox and R Meyer, Effecting Compliance (London: British Institute of International and Comparative Law1993), p. 3.

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great as those which the ICC handles.83 Although the latter body is intended to deal withindividuals, it is nevertheless exercising a jurisdiction more on the international scale ofmisconduct than that of the Tribunal. Therefore, it can be said that, notwithstanding thecreation of the ICC, bodies such as the Tribunal will nevertheless not be likely todisappear in future.84

Conclusion: a promise fulfilled?

It can be seen that the Tribunal was a body created in circumstances of some significantcontroversy. The historical conditions in which it was formed were characterised bysubstantial political volatility, in a region in which political instability was endemic. In theseconditions, public pressure was placed upon key players in the region: the United Nations,the United States, France and the United Kingdom to take action to restore stability andexact justice from those who had committed serious crimes. Hence, in addition to pressurebeing imposed for the undertaking of military intervention, pressure was also exerted forthe establishment of a judicial body to try such offences. This was the first such ad hoctribunal since the close of the Second World War.

One of the stated objectives of the Tribunal from the very outset was assisting in thepreservation of peace within the region.85 For all of the reasons already discussed, it wouldbe unforgivably naive to believe that a judicial institution could achieve this end unaided.The participation of NATO and United Nations troops in the region was essential to therestoration of stability. Nevertheless, the Tribunal has gone some significant way towardsassisting in the preservation of that stability, and it is contended that this is for twoprincipal reasons.

The first is found in the imposition of penalties on those who have committed offencesin the region. It is submitted that this has secured the perception of justice for those whosuffered at the hands of the perpetrators. This must necessarily have had the effect ofleading the victims away from taking any “self-help” action. The fact that there was anindependent entity securing justice for the victims can be said to have taken away at leastsome of the sting of the acts themselves.

Secondly, and perhaps more importantly, the Tribunal has worked with the nations inthe region to ensure that justice is served at both a domestic and international level. Inparticular, the Tribunal has gradually been transferring skills,86 and ultimately investigativefiles, to the prosecutors of the states within the region.87 This restabilisation of the judicialprocess in the Balkans has the capacity to aid in achieving both political and militarysecurity, by ensuring that each individual state takes a degree of responsibility formaintaining peace and good order. Although this may not be a perfect solution to theproblems of the area, it is certainly one which has been shown to be effective thus far, andalso represents a somewhat unique use of a judicial institution to achieve internationalpolitical order.

It is fair to say that in responding to the pressure, those parties satisfied many of thetheoretical requirements for such a body. The lethargy with which the Tribunal was


83 Fox and Meyer, Effecting Compliance, n. 82 above, p. 7.84 Note that this is borne out by the creation of the tribunal for Rwanda.85 First Annual Report, paras 7 and 11.86 Report of the International Tribunal for the Prosecution of Persons Responsible for Serious Violations of International

Humanitarian Law Committed in the Territory of the Former Yugoslavia Since 1991, S/2009/394, 31 July 2009,para. 76ff.

87 Report of the International Tribunal, n. 54 above, para. 71ff and 80–5.

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established, the paucity of funding at the outset and the absence of any serious attempt inthe early years to bring accused persons before the Tribunal have all been said to beindicative of a lack of commitment by the parties involved. Initially, it could be said thatthey were found wanting in many practical aspects, although this seems to be more asymptom of both seeking to protect their own citizens, as well as misapprehending theenormity of the task, rather than deliberately avoiding the leadership responsibility whichthey took upon themselves. Ultimately, the theoretical lessons from the Nuremberg andTokyo tribunals had been well learned, as well as the practical lessons from even earlierattempts to try soldiers for criminal conduct during time of war. The statute of the Tribunalwas crafted in such a way that the status and prestige of the Tribunal as an independentjudicial entity were preserved, while still imposing personal liability on those individuals whocommitted atrocious offences. In the end, it is clear that compromise was essential, in orderto achieve any effective outcome. In this instance, the compromise which was adopted wasone which ensured the operation of a practical and effective judicial institution.


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